CH 4

Managerial Economics
Chapter 2
Demand,
Supply,
and
Market Equilibrium
1
Demand
 Quantity demanded (Qd)
 Amount of a good or service consumers are
willing & able to purchase during a given period
of time
2
General Demand Function

 Six variables that influence Qd
 Price of good or service (P)
 Incomes of consumers (M)
 Prices of related goods & services (PR)
• Taste patterns of consumers ( ℑ )

• Expected future price of product (Pe)
• Number of consumers in market (N)
• General demand function
• Qd = f ( P, M , PR ,ℑ , Pe , N )
3

Qd = a + bP + cM + dPR + e ℑ + fPe + gN
 b, c, d, e, f, & g are slope parameters
 Measure effect on Q of changing one of the variables
d
while holding the others constant
 Sign of parameter shows how variable is related
to Qd
 Positive sign indicates direct relationship
 Negative sign indicates inverse relationship
4

Variable Relation to Qd Sign of Slope Parameter
P Inverse b = ∆ Qd/∆ P is
negative
Direct for normal goods c = ∆ Qd/∆ M is
M
Inverse for inferior goods c = ∆ Qd/∆
positive M is
Direct for substitutes negative
d = ∆ Qd/∆ PR is
PR
Inverse for complements d = ∆ Qd/∆
positive PR is
negative
ℑ Direct e = ∆ Qd/∆ℑ is
positive
Pe Direct f = ∆ Qd/∆ Pe is
positive
N Direct g = ∆ Qd/∆ N is
5
positive
Direct Demand Function

 The direct demand function, or simply demand,
shows how quantity demanded, Qd , is related to
product price, P, when all other variables are held
constant
 Q = f(P)
d
 Law of Demand
 Qd increases when P falls & Qd decreases when P rises, all
else constant
 ∆ Qd/∆ P must be negative
6
Inverse Demand Function

 Traditionally, price (P) is plotted on the
vertical axis & quantity demanded (Qd) is
plotted on the horizontal axis
 The equation plotted is the inverse demand
function, P = f(Qd)
7
Graphing Demand Curves

A point on a direct demand curve shows
either:
 Maximum amount of a good that will be
purchased for a given price
 Maximum price consumers will pay for a specific
amount of the good
8
A Demand Curve (Figure 2.1)
9
Graphing Demand Curves

 Change in quantity demanded
 Occurs when price changes
 Movement along demand curve
 Change in demand
 Occurs when one of the other variables, or
determinants of demand, changes
 Demand curve shifts rightward or leftward
10
Shifts in Demand (Figure 2.2)
11
Supply
 Quantity supplied (Qs)
 Amount of a good or service offered for sale
during a given period of time
12
Supply
 Six variables that influence Qs
 Price of good or service (P)
 Input prices (PI )
 Prices of goods related in production (Pr)
 Technological advances (T)
 Expected future price of product (Pe)
 Number of firms producing product (F)
 General supply function

Qs = f ( P, PI , Pr , T , Pe , F )
13
General Supply Function

Qs = h + kP + lPI + mPr + nT + rPe + sF
 k, l, m, n, r, & s are slope parameters
 Measure effect on Q of changing one of the variables
s
while holding the others constant
 Sign of parameter shows how variable is related
to Qs
 Positive sign indicates direct relationship
 Negative sign indicates inverse relationship
14
General Supply Function

Variable Relation to Qs Sign of Slope Parameter
P Direct k = ∆ Qs/∆ P is positive
PI Inverse l = ∆ Qs/∆ PI is
negative
Inverse for substitutes m = ∆ Qs/∆ Pr is
Pr Direct for complements m = ∆ Qs/∆ Pr is
negative
positive
T Direct n = ∆ Qs/∆ T is
positive
Pe Inverse r = ∆ Qs/∆ Pe is
negative
F Direct s = ∆ Qs/∆ F is positive
15
Direct Supply Function

 The direct supply function, or simply supply,
shows how quantity supplied, Qs , is related to
product price, P, when all other variables are
held constant
 Q = f(P)
s
16
Inverse Supply Function

 Traditionally, price (P) is plotted on the
vertical axis & quantity supplied (Qs) is plotted
on the horizontal axis
 The equation plotted is the inverse supply
function, P = f(Qs)
17
Graphing Supply Curves

A point on a direct supply curve shows either:
 Maximum amount of a good that will be offered
for sale at a given price
 Minimum price necessary to induce producers to
voluntarily offer a particular quantity for sale
18
A Supply Curve (Figure 2.3)
19
Graphing Supply Curves

 Change in quantity supplied
 Occurs when price changes
 Movement along supply curve
 Change in supply
 Occurs when one of the other variables, or
determinants of supply, changes
 Supply curve shifts rightward or leftward
20
Shifts in Supply (Figure 2.4)
21
Market Equilibrium
 Equilibrium price & quantity are determined
by the intersection of demand & supply
curves
 At the point of intersection, Qd = Qs
 Consumers can purchase all they want &
producers can sell all they want at the “market-
clearing” or price
22
Market Equilibrium (Figure 2.5)
23
Market Equilibrium
 Excess demand (shortage)
 Exists when quantity demanded exceeds
quantity supplied
 Excess supply (surplus)
 Exists when quantity supplied exceeds quantity
demanded
24
Value of Market Exchange

 Typically, consumers value the goods they
purchase by an amount that exceeds the
purchase price of the goods
 Economic value
 Maximum amount any buyer in the market is willing
to pay for the unit, which is measured by the
demand price for the unit of the good
25
Measuring the Value of Market
Exchange
 Consumer surplus
 Difference between the economic value of a good (its
demand price) & the market price the consumer must
pay
 Producer surplus
 For each unit supplied, difference between market price
& the minimum price producers would accept to supply
the unit (its supply price)
 Social surplus
 Sum of consumer & producer surplus
 Area below demand & above supply over the relevant
range of output
26
Measuring the Value of Market
Exchange (Figure 2.6)
27
Changes in Market Equilibrium

 Qualitative forecast 质量预测
 Predicts only the direction in which an
economic variable will move
 Quantitative forecast
 Predicts both the direction and the magnitude
数量 of the change in an economic variable
28
Demand Shifts (Supply Constant)
(Figure 2.7)
29
Supply Shifts (Demand Constant)
(Figure 2.8)
30
Simultaneous Shifts
 When demand & supply shift
simultaneously 同时的
 Can predict either the direction in which price
changes or the direction in which quantity
changes, but not both
 The change in equilibrium price or quantity is
said to be indeterminate 不确定 when the
direction of change depends on the relative
magnitudes by which demand & supply shift
31
Simultaneous Shifts: (↑D, ↑S)

P
S
S’
S’’
B
P’ A •
P •
P’’ •C
D’
Q
Q Q’ Q’’
Price may rise or fall; Quantity rises 32

Simultaneous Shifts: (↓D, ↑S)

P
S
S’
S’’
A
P •
B
P’ •
P’’ •C D
D’
Q
Q’ Q Q’’
Price falls; Quantity may rise or fall 33

Simultaneous Shifts: (↑D, ↓S)

P
S’’
S’
S
P’’ • C
B
P’ •
A
P •
D’
Q
Q’’ Q Q’
Price rises; Quantity may rise or fall 34

Simultaneous Shifts: (↓D, ↓S)

P
S’’
S’
S
P’’ •C A
P •
P’ • B
D
D’
Q
Q’’ Q’ Q
Price may rise or fall; Quantity falls 35

Ceiling & Floor Prices

 Ceiling price
 Maximum price government permits sellers to
charge for a good
 When ceiling price is below equilibrium, a
shortage occurs
 Floor price
 Minimum price government permits sellers to
charge for a good
 When floor price is above equilibrium, a surplus
occurs
36
Ceiling & Floor Prices (Figure 2.12)
Px Px
Sx Sx
3
2 2
) sr all od( eci r P

) sr all od( eci r P
Dx Dx
Qx Qx
22 50 62 32 50 84
Quantity Quantity
Panel A – Ceiling price Panel B – Floor price 37

CH 4

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CH 4

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Managerial Economics

General Demand Function

• Taste patterns of consumers ( ℑ )

General Demand Function

General Demand Function

Direct Demand Function

Inverse Demand Function

Graphing Demand Curves

A Demand Curve (Figure 2.1)

Graphing Demand Curves

Shifts in Demand (Figure 2.2)

General Supply Function

General Supply Function

P Direct k = ∆ Qs/∆ P is positive

Direct Supply Function

Inverse Supply Function

Graphing Supply Curves

A Supply Curve (Figure 2.3)

Graphing Supply Curves

Shifts in Supply (Figure 2.4)

Market Equilibrium (Figure 2.5)

Value of Market Exchange

Changes in Market Equilibrium

Simultaneous Shifts: (↑D, ↑S)

Price may rise or fall; Quantity rises 32

Simultaneous Shifts: (↓D, ↑S)

Price falls; Quantity may rise or fall 33

Simultaneous Shifts: (↑D, ↓S)

Price rises; Quantity may rise or fall 34

Simultaneous Shifts: (↓D, ↓S)

Price may rise or fall; Quantity falls 35

Ceiling & Floor Prices

Ceiling & Floor Prices (Figure 2.12)

) sr all od( eci r P

Panel A – Ceiling price Panel B – Floor price 37

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