Economics for Managers
by Paul Farnhamy
Chapter 2:
Chapter 2:
Demand Supply and Demand, Supply, and
Equilibrium Prices
2.1
Demand Demand
The functional relationship between the price of a good between the price of a good
or service and the quantity demanded by consumers in demanded by consumers in
a given time, all else held constant
constant
Non-Price Factors
I fl i D d
Influencing Demand
1.
Tastes and preferences
Affected by socioeconomic factors Affected by socioeconomic factors such as age, sex, race, marital
status, and education level,
2.
Income
Th l l f i ff t
The level of income affects
demand for normal goods and inferior goods
2.3
inferior goods
Non-Price Factors
I fl i D d
Influencing Demand
3. Prices of related goods
Substitute goods – when one good Substitute goods when one good can be used in the place of another
Complementary goodsp y g – two or more goods that consumers use together
4. Future expectations
5. Number of consumers
Demand Function Demand Function
QXD = f (PX, T, I, PY, PZ, EXC, NC, … where
Q tit d d d f d X
QXD = quantity demanded of good X P = price of good X
PX = price of good X
T = variables representing tastes and T variables representing tastes and
preferences I i
2.5
I = income
(continued on next slide)
The Demand Function The Demand Function
QXD = f (PX, T, I, PY, PZ, EXC, NC, … where
P and P = prices of goods Y and Z PY and PZ = prices of goods Y and Z,
which relate to consumption of good X
EXC t ti b t
EXC = consumer expectations about future prices
NC b f
NC = number of consumers
(NOTE: Ellipsis is used to indicate many other
( p y
variables that influence demand)
Demand Curves Demand Curves
Figure 2.1
The demand curve shows the
relationship between
P1 A
relationship between price of a good and quantity demanded,
A
B P1
P2
quantity demanded, all else constant
0 Q Q
Demand
2.7
Quantity
0 Q1 Q2
More About D d C
Demand Curves
Demand shifters: variables held constant when defining a demand
b t ld hift if th i l
curve but would shift if their values changed
N ti (i ) l ti hi h
Negative (inverse) relationship: where an increase in one variable causes a decrease in another
decrease in another
Change in quantity demanded: results when consumers react to change in
when consumers react to change in price of a good
Increase in Demand Increase in Demand
Figure 2.2
D2 A change in demand occurs when one or
D1 more of the factors are held constant in d fi i i
P1
defining a given
demand curve change
0
2.9
Quantity
0 Q1 Q2
Individual Versus M k t D d C
Market Demand Curve
Horizontal summation of individual demand curves: for every price, the
y p , quantity that each person demands at that price determines market
quantity demanded at that price
The market demand curve, D The market demand curve, D
MM, ,
considers quantities demand at
other prices p
Individual Versus Market D d C
Demand Curve
Figure 2.3
P1
DB
DM = DA + DB DA
0 Q Q Q Q
© 2005 Prentice Hall, Inc. Quantity 2.11
0 Q1 Q2 Q3 Q4
Linear Demand
F ti d C
Functions and Curves
Mathematical relationships with no exponents that take a value p other than 1
Simplification of analysis Simplification of analysis
Best representation of individuals’
behavior behavior
Not all demand functions are li
linear
Demand Function as an
E ti (f )
Equation (for copper)
QD = 10 - 50PC + 0.3I + 1.5TC + 0.5E where QD = quantity demanded of copper
P = price of copper PC = price of copper
I = consumer income index
TC = index showing uses for copper
2.13
E = expectations index
Managerial Rule of Thumb:
D d C id ti
Demand Considerations
Managers must
• Understand what influences
• Understand what influences demand
Determine which factors they can
• Determine which factors they can influence
D t i h t h dl f t
• Determine how to handle factors they cannot influence
Supply Supply
The functional relationship between the price of a good or service and
the quantity that producers are the quantity that producers are willing to supply in a given time,
all else held constant.
2.15
Non-Price Factors I fl i S l Influencing Supply
State of technology
Input prices
Input prices
Prices of goods related in d ti
production
Future expectations p
Number of producers
Ch i t d b i
Changes in trade barriers
The Supply Function The Supply Function
QXS = f (PX, TX, PI, PA, PB, EXP, NP, … where
Q tit li d f d X
QXS = quantity supplied of good X P = price of good X
PX = price of good X
TX = state of technology TX = state of technology
P i f th i t f d ti
2.17
PI = prices of the inputs of production
(continued on next slide)
The Supply Function The Supply Function
QXS = f (PX, TX, PI, PA, PB, EXP, NP, … where
P P = price of goods A and B related PA, PB = price of goods A and B, related
to good X
EXP = producer expectations about EXP = producer expectations about
future prices
NP = number of producers NP = number of producers
(NOTE: Ellipsis is used to indicate many other
( p y
variables that influence supply)
Supply Curve f P d t
for a Product
Figure 2.4rice
Supply
Pr B
P2
A Relationship
between price P2
P between price
of a good and quantity
P1
quantity supplied 0
2.19
Quantity
0 Q1 Q2
Supply Relationships Supply Relationships
Not all supply curves are linear
Supply curve does not show actual
Supply curve does not show actual price of product but the relationship of alternative prices and quantitiesp q
A positive relationship is shown as upward line where increase in one p variable causes increase in another variable
Changes (Increase) i S l
in Supply
Figure 2.5S1 A change in
supply occurs
S2
when one or more of the factors held constant in
P1
constant in
defining a given supply curve
0
supply curve change
2.21
Quantity
0 Q1 Q2
Change in
Q tit S li d Quantity Supplied
A price change causes movement from one point to another
• An increase in price of a substitute
good causes the supply curve to shift to the left; a decreases shifts it to the to the left; a decreases shifts it to the right
• If the price of a complementary goodIf the price of a complementary good increases, the supply increases
• An increase in the number of producers shifts it to the right
Managerial Rule of Thumb:
S l C id ti
Supply Considerations
Managers must
• Examine technology and costs of
• Examine technology and costs of production
Find ways to increase productivity
• Find ways to increase productivity while lowering production costs
2.23
Demand, Supply, d E ilib i
and Equilibrium
A price for a good or service is determined when the market
reaches equilibrium
The quantity demanded of good X The quantity demanded of good X equals the quantity producers are willing to supply g pp y
An upset in equilibrium pushes
the price back toward equilibrium
the price back toward equilibrium
Market Equilibrium Market Equilibrium
Figure 2.6
Market
equilibrium
Supply PE
equilibrium occurs where demand
demand
equals supply
Demand
Quantity
0 Q
e a d
© 2005 Prentice Hall, Inc. 2.25
Quantity
QE = equilibrium quantity PE = equilibrium price
0 QE
Lower-Than- E ilib i P i
Equilibrium Prices
Consumers demand more of a
good than producers are willing to
g p g
supply at that price
Supply and demand become Supply and demand become unstable
An adjustment process begins
An adjustment process begins which seeks to again bring
equilibrium
equilibrium
Changes in Equilibrium P i d Q titi
Prices and Quantities
Change in demand
Change in supply
Change in supply
Changes on both sides of the k t
market
2.27
Summary of Key Terms Summary of Key Terms
Demand
Functional relationshipp
Normal and inferior goods
Substitute and complementary goodsp y g
Individual and market demand functions
Demand shifters
Negative (inverse) and positive (direct) relationships
relationships
Summary of Key Terms Summary of Key Terms
Change in quantity demanded
Linear demand and supply functionspp y
Supply
Input prices and prices related in p p p production
Supply shifters
Equilibrium price
Lower-than-equilibrium price
2.29
