Managerial economics economic tools for todays decision makers 7th edtion by keat young and erfle chapter 03

Learning Objectives• Define supply, demand, and equilibrium price • List and provide specific examples of the non-price determinants of supply and demand • Distinguish between the short-

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Chapter 3

Supply and Demand

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Chapter Outline

• Market demand

• Market supply

• Market equilibrium

• Comparative statics analysis

• Supply, demand, and price

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Learning Objectives

• Define supply, demand, and equilibrium price

• List and provide specific examples of the non-price determinants of supply and demand

• Distinguish between the short-run rationing

function and long-run guiding function of price

• Illustrate how the concepts of supply and demand can be used in management decisions about price and allocations of resources

• Use supply and demand diagrams to determine

price in the short and long run

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Market Demand

• “Ready” implies that consumers are

prepared to buy a good or service both

because they are:

– Willing: Consumers have a preference for it.

– Able: Consumers have the income to support this

preference

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Market Demand

Market demand is the sum of all the individual

demands

• Individuals may have distinct demand curves,

and they sum to the overall demand in the market

Example: demand for pizza

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Market Demand

• Graphical

Representation of Demand

• Algebraic

Representation of Demand

Qd=700-100P

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Market Demand

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Market Demand

• Non-price determinants of demand-result is

a shift in the demand curve.

– tastes and preferences

– income

– prices of related products

– future expectations

– number of buyers

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Market Supply

• Changes in price result in changes in the

quantity supplied

– shown as movement along the supply curve

• Changes in non-price determinants result in changes in supply

– shown as a shift in the supply curve

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Market Supply

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Market Supply

• Non-price determinants of supply-results in

a shift in the supply curve.

– costs and technology

– prices of other goods or services offered by the seller

– future expectations

– number of sellers

– weather conditions

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Market Equilibrium

• Equilibrium price: the price that equates

the quantity demanded with the quantity

supplied

• Equilibrium quantity: the amount that

people are willing to buy and sellers are

willing to offer at the equilibrium price level

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• Shortage: a market situation in which the

quantity demanded exceeds the quantity

supplied

– shortage occurs at a price below the equilibrium level

• Surplus: a market situation in which the

quantity supplied exceeds the quantity

demanded

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Comparative Statics Analysis

• Comparative statics is a form of

sensitivity (or what-if) analysis

– Commonly used method in economic analysis

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• Process of comparative statics analysis:

– state all the assumptions needed to construct the model

– begin by assuming that the model is in

equilibrium– introduce a change in the model, so a condition

of disequilibrium is created– find the new point of equilibrium

– compare the new equilibrium point with the

original one

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Step 1

• assume all factors

except the price of

pizza are constant

• buyers’ demand and

sellers’ supply are

represented by lines

shown

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Step 2

• begin the analysis

in equilibrium as

shown by Q1 and P1

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Step 3

• assume that a new

study shows pizza

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• The short run is the period of time in

which:

– sellers already in the market respond to a

change in equilibrium price by adjusting variable inputs

– buyers already in the market respond to changes

in equilibrium price by adjusting the quantity demanded for the good or service

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• Short run changes show the rationing

function of price

– The rationing function of price is the change in market price to eliminate the imbalance between quantities supplied and demanded

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Comparative Static Analysis:

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Long-run

• The long run is the period of time in which:

– new sellers may enter a market

– existing sellers may exit from a market

– existing sellers may adjust fixed factors of

production– buyers may react to a change in equilibrium

price by changing their tastes and preferences

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Long-run

• Long run changes show the allocating

function of price

• The guiding or allocating function of

price is the movement of resources into or out of markets in response to a change in

the equilibrium price.

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curve to S2– equilibrium price and

quantity (to P3, Q3)

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into the market

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Summary: Short-Run and Long-Run

Changes in the Market

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Supply, Demand, and Price

• In the extreme case, the forces of supply

and demand are the sole determinants of

the market price, not any single firm.

– this type of market is ‘perfect competition’

• In many cases, individual firms can exert

market power over price because of their:

– dominant size

– ability to differentiate their product through

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Supply, Demand, and Price

• Discussion of changes in the computer

industry

– Makers of PCs, notebooks and jump drives are facing slower growth in the demand for their products as technology is changing

– What impact do you think cloud computing will have on the demand for stand-alone applications such as Microsoft Office or storage devices for

computers?

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Global Application

What are the implications of rising demand for oil among developing counties?

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Summary

• The law of demand states that, other factors held constant, the quantity demanded is

inversely related to price.

• The law of supply states that, other factors held constant, the quantity supplied is

directly related to price.

• Non-price factors may shift the curves.

• Price serves a short-run rationing function

and a long-run guiding function in the

marketplace.

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