Professional Documents
Culture Documents
Business Strategy
Chapter 2
Market Forces: Demand and Supply
McGraw-Hill/Irwin
Michael R. Baye, Managerial Economics and
Business Strategy Copyright 2008 by the McGraw-Hill Companies, Inc. All rights reserved.
2-2
Overview
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
2-5
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:
2
D
1 2 3 4 5 Quantity
Consumer Surplus: 2-13
10
Value
Consumer 8 of 4 units = $24
Surplus =
$24 - $8 =
$16
6
4 Expenditure on 4 units =
$2 x 4 = $8
2
D
1 2 3 4 5 Quantity
2-14
Price
S0
Quantity
2-15
Supply Shifters
Input prices
Technology or
government regulations
Number of firms
Entry
Exit
Substitutes in production
Taxes
Excise tax
Ad valorem tax
Producer expectations
2-16
S0
B
20
A
10
5 10 Quantity
2-19
Change in Supply
S0 to S1: Increase in supply
Price
S0
S1
5 7 Quantity
2-20
Producer Surplus
The amount producers receive in excess of the amount
necessary to induce them to produce the good.
Price
S0
P*
Q* Quantity
2-21
Market Equilibrium
The Price (P) that Balances
supply and demand
QxS = Qxd
No shortage or surplus
Steady-state
2-22
7
6
Shortage D
12 - 6 = 6
6 12 Quantity
2-23
If price is too high
Surplus
Price 14 - 6 = 8
S
9
8
7
6 8 14 Quantity
2-24
Price Restrictions
Price Ceilings
The maximum legal price that can be charged.
Examples:
Gasoline prices in the 1970s.
Housing in New York City.
Proposed restrictions on ATM fees.
Price Floors
The minimum legal price that can be charged.
Examples:
Minimum wage.
Agricultural price supports.
2-25
PF
P*
P Ceiling
Shortage D
Qs Qd Quantity
Q*
2-26
P*
Qd Q* QS Quantity
2-29
P0
P*
Quantity of PCs
Q0 Q*
2-34
P1
P0
D*
Q0 Q1 Quantity of
Software
2-37
Conclusion
Use supply and demand analysis to
clarify the big picture (the general impact of a current
event on equilibrium prices and quantities).
organize an action plan (needed changes in production,
inventories, raw materials, human resources, marketing
plans, etc.).