MANAGERIAL ECONOMICS 11th Edition

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MANAGERIAL ECONOMICS 11th Edition

• By
• Mark Hirschey

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Demand and Supply

• Chapter 3

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Chapter 3OVERVIEW

• Basis for Demand
• Market Demand Function
• Demand Curve
• Basis For Supply
• Market Supply Function
• Supply Curve
• Market Equilibrium

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Chapter 3KEY CONCEPTS

• demand
• direct demand
• utility
• derived demand
• demand function
• demand curve
• change in the quantity demanded
• shift in demand
• Supply

• supply function
• supply curve
• change in the quantity supplied
• shift in supply
• equilibrium
• market equilibrium price
• surplus
• shortage
• comparative statics analysis

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Basis for Demand

• Quantity Demanded The amount of a good or
  service consumers are willing and able to
  purchase during a given period of time (week,
  month, etc..). (Desire without purchasing power
  may lead to want, but not demand).

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• 1. Direct Demand
• Demand is the quantity customers are willing to
  buy under current market conditions.
• Direct demand is demand for consumption.
• The value of a good or service, its utility, is
  the prime determinant of direct demand.
  Individuals attempt to maximize the utility
  provided by the goods and services they buy and
  consume.

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• 2. Derived Demand
• Demand for inputs used in production.
• For inputs used in the production of other
  products, profit maximization provides the
  underlying rationale for derived demand.

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Market Demand Function

• Determinants of Demand
• Demand is determined by price, prices of other
  goods, expectations of price changes, consumer
  incomes, tastes and preferences, advertising
  expenditure, the number of consumers in the
  market, and so on.

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• Industry Demand Versus Firm Demand
• Industry demand is subject to general economic
  conditions.
• Firm demand is determined by economic conditions
  and competition.

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Demand Function

• A table, graph, or an equation that shows how
  quantity demanded is related to product price,
  holding constant all the other variables that
  influence demand.
• Demand schedule a table showing a list of
  possible product prices and the corresponding
  quantities demanded.

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Demand Curve

• Demand Curve A graph showing the relation
  between the quantity demanded and price when all
  other variables influencing quantity demanded are
  held constant.

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Relation Between the Demand Curve and Demand
Function

• Law of demand Quantity demanded increase when
  price falls, and quantity demanded decreases when
  price rises, other things held constant.
• Change in quantity demanded A movement along a
  given demand curve that occurs when the price of
  the good changes, all else constant.

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• Shift to another demand curve when non-price
  variables change.
• Increase in demand A change in the demand
  function that causes an increase in quantity
  demanded at every price and is reflected by a
  rightward shift in the demand curve.
• Decrease in demand A change in the demand
  function that causes a decrease in quantity
  demanded at every price and is reflected by a
  leftward shift in the demand curve.

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Basis For Supply

• How Output Prices Affect Supply
• Firms offer supply to make profits.
• Higher prices boost the quantity supplied.
• Lower prices cut the quantity supplied.
• Other Factors That Influence Supply
• Everything that affects marginal production costs
  affects supply.
• If MC falls, supply rises.
• If MC rises, supply falls.

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Market Supply Function

• Determinants of Supply
• Supply is determined by price, prices of other
  goods, technology, and so on.
• Industry Supply Versus Firm Supply
• Firm supply is determined by economic conditions
  and competition.
• Industry supply is the horizontal sum of firm
  supply.

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Supply Function

• Supply function shows how quantity supplied is
  related to product price, holding constant all
  the other variables that influence supply.
• Determinants of supply Variables that cause a
  change in supply (a shift in the supply curve)

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Supply Curve

• A graph showing the relation between quantity
  supplied and price, when all other variable
  influencing quantity supplied are held constant
• Supply schedule A table showing a list of
  possible product prices and the corresponding
  quantities supplied

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Relation Between Supply Curve and Supply Function

• Change in quantity supplied A movement along a
  given supply curve that occurs when the price of
  a good changes.
• Increase in supply A change in the supply
  function that causes an increase in quantity
  supplied at every price and is reflected by a
  rightward shift in the supply curve.

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Relation Between Supply Curve and Supply Function

• Decrease in supply A change in the supply
  function that causes a decrease in quantity
  supplied at every price, and is reflected by a
  leftward shift in the supply curve.

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Market Equilibrium

• Decrease in supply A change in the supply
  function that causes a decrease in quantity
  supplied at every price, and is reflected by a
  leftward shift in the supply curve.
• A situation in which, at the prevailing price,
  consumers can buy all of a good they wish and
  producers can sell all of the good they wish.
• The price at which QdQs.
• Equilibrium price the price at which QdQs

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• Equilibrium quantity The amount of a good bought
  and sold in market equilibrium.
• Excess supply (Surplus) Quantity supplied
  exceeds quantity demanded.
• Excess demand (Shortage) Quantity demanded
  exceeds quantity supplied.

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Comparative Statics Changing Demand

• Equilibrium changes with demand shifts.
• Comparative Statics Changing Supply
• Equilibrium changes with supply shifts.
• Comparative Statics Changing Demand and
  Supply

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Self Test Problem 1

• A table or spreadsheet that illustrates the
  effect of price (P), on the quantity supplied
  (QS), quantity demanded (QD), and the resulting
  surplus () or shortage (-) as represented by the
  difference between the quantity supplied and the
  quantity demanded at various price levels is as
  follows

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• B. Using price (P) on the vertical Y axis and
  quantity (Q) on the horizontal X axis, a plot of
  the demand and supply curves for the
  lumber/forest products industry is as follows

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Self Test Problem 2

• A. Marginal production costs at each level of
  output are 
• Q 2,500 MC 100 0.004(2,500) 110
• Q 5,000 MC 100 0.004(5,000) 120
• Q 7,500 MC 100 0.004(7,500) 130

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• B. When output is expressed as a function of
  marginal cost
• MC 100 0.004Q
• 0.004Q -100 MC
• Q -25,000 250MC
• The level of output at each respective level of
  marginal cost is
• MC 100 Q -25,000 250(100) 0
•   MC 125 Q -25,000 250(125) 6,250 
• MC 150 Q -25,000 250(150) 12,500

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• C. Note from part B that MC 150 when Q
  12,500. Therefore, when MR 150, Q 12,500
  will be the profit-maximizing level of output.
  More formally
• MR MC 
• 150 100 0.004Q 
• 0.004Q 50
• Q 12,500

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•  D.
• Because prices are stable in the industry, P
  MR, this means that the company will supply chips
  at the level of output where
•   MR MC
•   and, therefore, that
•   P 100 0.004Q
•   This is the supply curve for math chips, where
  price is expressed as a function of quantity.
• When quantity is expressed as a function of
  priceP 100 0.004Q
•   0.004Q -100 P
•   Q -25,000 250P