Professional Documents
Culture Documents
Economics
Lecture 2
Demand and Supply
Overview
I. Market Demand Curve II. Market Supply
The Demand Function
Determinants of Demand
Consumer Surplus
Curve
2-2
D
Quantity
2-3
Determinants of Demand
2-4
Income
Normal good
Inferior good
Advertising and
consumer tastes
Population
Consumer expectations
M = income.
Normal good.
Inferior good.
2-5
2-6
Class Exercise I
Qxd = 12000-3Px+ 4Py 1M + 2Ax
Px=200, Py=15
Ax = 2000, M=10,000
Calculate how much X do consumers
purchase?
Are goods X and Y substitutes or
complements?
Is good X a normal or an inferior good?
A
B
D0
4
Quantity
2-8
Change in Demand
Price
6
D1
D0
7
13
Quantity
2-9
Consumer Surplus:
The value consumers get from a
good but do not have to pay for.
Consumer surplus will prove
particularly useful in marketing and
other disciplines emphasizing
strategies like value pricing and price
discrimination.
2-10
2-11
2-12
Consumer Surplus:
The Discrete Case
Price
Consumer Surplus:
The value received but not
paid for. Consumer surplus =
(8-2) + (6-2) + (4-2) = $12.
10
8
6
4
2
D
1
Quantity
2-13
Consumer Surplus:
The Continuous Case
Price $
10
Consumer
Surplus =
$24 - $8 =
$16
Value
of 4 units = $24
8
6
Expenditure on 4 units =
$2 x 4 = $8
4
2
D
1
Quantity
2-14
2-15
S0
Quantity
Supply Shifters
Input prices
Technology or
government regulations
Number of firms
Entry
Exit
Substitutes in production
Taxes
Unit tax
Ad valorem tax
Producer expectations
2-16
2-17
2-18
2-19
20
A
10
10
Quantity
Change in Supply
2-20
Price
S0
S1
8
6
5
Quantity
2-21
Producer Surplus
The amount producers receive in excess of the
amount necessary to induce them to produce the
good.
Price
S0
P*
Q*
Quantity
2-22
7
6
5
D
Shortage
12 - 6 = 6
6
12
Quantity
Price
9
8
7
D
6
14
Quantity
2-23
Market Equilibrium
The Price (P) that
Balances supply and
demand
QxS = Qxd
No shortage or surplus
Steady-state
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.
Price Floors
The minimum legal price that can be
charged.
Examples:
Minimum wage.
Agricultural price supports.
2-25
PF
P*
P Ceiling
D
Shortage
Qs
Q*
Qd
Quantity
2-26
Class Exercise II
Qxd = 10-2Px; Qxs = 2+2Px
Find out equilibrium Px and Qe
Assume a price ceiling of $1.5
Find Qxd ,Qxs, shortage or surplus, if
any
Find economic price
Find non-pecuniary price
PF = Pc + (PF - PC)
PF = full economic price
PC = price ceiling
PF - PC = nonpecuniary price
2-28
2-29
2-30
Surplus
PF
P*
D
Qd
Q*
QS
Quantity
2-31
2-33
2-34
Scenario 1: Implications
for a Small PC Maker
Step 1: Look for the Big Picture.
Step 2: Organize an action plan
(worry about details).
2-35
2-36
S
S*
P0
P*
Q*
Quantity of PCs
2-37
Scenario 2: Software
Maker
2-38
2-39
P1
P0
D*
D
Q0 Q1
Quantity of
Software
2-40
2-41
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.).