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Chapter 2

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8 views

Chapter 2

Uploaded by

Yousuf Aboya
Copyright
© © All Rights Reserved
We take content rights seriously. If you suspect this is your content, claim it here.
Available Formats
Download as PPTX, PDF, TXT or read online on Scribd
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Managerial Economics & Business

Strategy
Chapter 2
Market Forces: Demand and Supply
2-2

Overview

I. Market Demand Curve III. Market Equilibrium


– The Demand Function
IV. Price Restrictions
– Determinants of Demand
– Consumer Surplus V. Comparative Statics

II. Market Supply Curve


– The Supply Function
– Supply Shifters
– Producer Surplus
2-3

Market Demand Curve


• Shows the amount of a good that will be
purchased at alternative prices, holding
other factors constant.
• Law of Demand
– The demand curve is downward sloping.
Price

D
Quantity
2-4

Determinants of Demand
• Income
– Normal good
– Inferior good
• Prices of Related Goods
– Prices of substitutes
– Prices of complements
• Advertising and
consumer tastes
• Population
• Consumer expectations
The Demand Function
2-5

• A general equation representing the demand curve


Qxd = f(Px , PY , M, H,)

– Qxd = quantity demand of good X.


– Px = price of good X.
– PY = price of a related good Y.
• Substitute good.
• Complement good.
– M = income.
• Normal good.
• Inferior good.
– H = any other variable affecting demand.
2-6

Inverse Demand Function

• Price as a function of quantity


demanded.
• Example:
– Demand Function
• Qxd = 6060 – 3Px
– Inverse Demand Function:
• 3Px = 6060 – Qxd
• Px = 2020 – 1/3Qxd
2-7

Change in Quantity Demanded


Price
A to B: Increase in quantity demanded

A
10

B
6

D0

4 7 Quantity
2-8

Change in Demand
Price
D0 to D1: Increase in Demand

6
D1

D0
7 13 Quantity
2-9

Consumer Surplus:

• The value consumers


get from a good but do
not have to pay for.
• Consumer surplus will
prove particularly useful
in marketing and other
disciplines emphasizing
strategies like value
pricing and price
discrimination.
2-10

I got a great deal!


• That company offers a lot
of bang for the buck!
• Dell provides good value.
• Total value greatly exceeds
total amount paid.
• Consumer surplus is large.
2-11

I got a lousy deal!


• That car dealer drives a
hard bargain!
• I almost decided not to
buy it!
• They tried to squeeze the
very last cent from me!
• Total amount paid is
close to total value.
• Consumer surplus is low.
Consumer Surplus:
2-12

The Discrete Case


Price
Consumer Surplus:
10 The value received but not
8 paid for. Consumer surplus =
(8-2) + (6-2) + (4-2) = $12.
6

2
D
1 2 3 4 5 Quantity
2-13

Market Supply Curve


• The supply curve shows the amount of a
good that will be produced at alternative
prices.
• Law of Supply
– The supply curve is upward sloping.
Price
S0

Quantity
2-14

Supply Shifters
• Price of a good
• Input prices
• Technology
• Number of firms
– Entry
– Exit
• Substitutes in production
• Future Expectations
• Taxes
– Excise tax
– Ad valorem tax
The Supply Function 2-15

• An equation representing the supply curve:


QxS = f(Px , PR ,W, H,)

– QxS = quantity supplied of good X.


– Px = price of good X.
– PR = price of a production substitute.
– W = price of inputs (e.g., wages).
– H = other variable affecting supply.
2-16

Supply Function

• Price as a function of quantity supplied.


• Example:
– Supply Function
• Qxs = -400 +3Px

• 3Px = 400 + Qxs

• Px = 400/3 + 1/3 Qxs


2-17

Change in Quantity Supplied


Price A to B: Increase in quantity supplied

S0
B
20

A
10

5 10 Quantity
2-18
Change in Supply
S0 to S1: Increase in supply
Price

S0

S1

5 7 Quantity
2-19

Producer Surplus
• The amount producers receive in excess of the amount
necessary to induce them to produce the good.
Price

S0
P*

Q* Quantity
2-20

Market Equilibrium
• The Price (P) that Balances
supply and demand
– QxS = Qxd
– No shortage or surplus
2-21

If price is too low…


Price S

7
6

Shortage D
12 - 6 = 6
6 12 Quantity
2-22
If price is too high…
Surplus
Price 14 - 6 = 8
S
9
8
7

6 8 14 Quantity
2-23
Price Restrictions
• Price Ceilings
– The maximum legal price that can be charged.
– Examples:
• Gasoline prices in the 1970s.
• Housing in New York City.
• Price Floors
– The minimum legal price that can be charged.
– Examples:
• Minimum wage.
• Agricultural price supports.
2-24

Impact of a Price Ceiling


Price S

PF

P*

P Ceiling

Shortage D

Qs Qd Quantity
Q*
2-26

Impact of a Price Floor


Price Surplus S
PF

P*

Qd Q* QS Quantity
2-28

Comparative Static Analysis


• How do the equilibrium price and quantity
change when a determinant of supply
and/or demand change?
• Increase in demand => Equilibrium Q Equilibrium P

• Decrease in demand => Equilibrium Q Equilibrium P

• Increase in supply => Equilibrium Q Equilibrium P

• Decrease in supply => Equilibrium Q Equilibrium P

• Increase in supply and demand => Equilibrium Q Equilibrium price may , or


remain constant

• Decrease in supply and demand => Equilibrium Q Equilibrium price may , or


remain constant

• Increase in S and decrease in D => Equilibrium P Equilibrium Q may , or


remain constant

• Increase in D and decrease in S => Equilibrium P Equilibrium Q may , or


remain constant
2-30
Applications of Demand and Supply
Analysis
• Event: The reports says that the prices of PC
components are expected to fall by 5-8
percent over the next six months.
• Scenario 1: You manage a small firm that
manufactures PCs.
• Scenario 2: You manage a small software
company.
2-31

Use Comparative Static Analysis


to see the Big Picture!
• Comparative static analysis shows how the
equilibrium price and quantity will change
when a determinant of supply or demand
changes.
2-32

Scenario 1: Implications for a Small


PC Maker
• Step 1: Look for the “Big Picture.”
• Step 2: Organize an action plan (worry
about details).
Big Picture: Impact of decline in 2-33

component prices on PC market


Price S
of
PCs S*

P0
P*

Quantity of PC’s
Q0 Q*
2-34

Big Picture Analysis: PC Market


• Equilibrium price of PCs will fall, and
equilibrium quantity of computers sold will
increase.
2-35

Scenario 2: Software Maker


• Step 1: Use analysis like that in Scenario 1
to deduce that lower component prices will
lead to
– a lower equilibrium price for computers.
– a greater number of computers sold.
• Step 2: How will these changes affect the
“Big Picture” in the software market?
2-36
Big Picture: Impact of lower PC prices on
the software market
Price S
of Software

P1
P0

D*

Q0 Q1 Quantity of
Software
2-37

Big Picture Analysis: Software Market

• Software prices are likely to rise, and more


software will be sold.
• Also graph the inverse demand function?
• Also graph the supply function?

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