Managerial economics economic tools for todays decision makers 7th edtion by keat young and erfle chapter 03

Chapter 3
Supply and
Demand


Chapter Outline
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Market demand
Market supply
Market equilibrium
Comparative statics analysis
Supply, demand, and price

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Learning Objectives
• Define supply, demand, and equilibrium price
• List and provide specific examples of the non-price
determinants of supply and demand
• Distinguish between the short-run rationing function
and long-run guiding function of price
• Illustrate how the concepts of supply and demand
can be used in management decisions about price

and allocations of resources.
• Use supply and demand diagrams to determine
price in the short and long run

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Market Demand
• The demand for a good or service is defined as:
– Quantities of a good or service that people are
ready, willing and able to buy at various prices
within some given time period. (Other factors
besides price held constant.)

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Market Demand
• “Ready” implies that consumers are prepared to
buy a good or service both because they are:
– Willing: Consumers have a preference for it.
– Able: Consumers have the income to support this
preference.

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Market Demand
Market demand is the sum of all the individual
demands.
• Individuals may have distinct demand curves,
and they sum to the overall demand in the
market.
Example: demand for pizza

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Market Demand
There is an inverse
relationship between
price and the quantity
demanded of a good or
service.
This is called the Law
of Demand.
Thus, the demand
curve is downward
sloping.
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Market Demand
• Graphical
Representation of
Demand
• Algebraic
Representation of
Demand
Qd=700-100P

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Market Demand
• Changes in price result in changes in the quantity
demanded
– This is shown as movement along the demand
curve.
• Changes in non-price factors result in changes in
demand
– This is shown as a shift in the demand curve.

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Market Demand

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Market Demand
• Non-price determinants of demand-result is a shift
in the demand curve.
–
–
–
–
–

tastes and preferences
income
prices of related products
future expectations
number of buyers

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Market Supply
• The supply of a good or service is defined as
quantities that people are ready to sell at various

prices within some given time period
(Other factors besides price held constant)

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Market Supply
• Changes in price result in changes in the quantity
supplied
– shown as movement along the supply curve
• Changes in non-price determinants result in
changes in supply
– shown as a shift in the supply curve

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Market Supply

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Market Supply
• Non-price determinants of supply-results in a shift in

the supply curve.
– costs and technology
– prices of other goods or services offered by the
seller
– future expectations
– number of sellers
– weather conditions

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Market Equilibrium
• Equilibrium price: the price that equates the
quantity demanded with the quantity supplied
• Equilibrium quantity: the amount that people are
willing to buy and sellers are willing to offer at the
equilibrium price level

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Market Equilibrium
• Shortage: a market situation in which the quantity
demanded exceeds the quantity supplied
– shortage occurs at a price below the equilibrium
level

• Surplus: a market situation in which the quantity
supplied exceeds the quantity demanded
– surplus occurs at a price above the equilibrium
level

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Market Equilibrium

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Comparative Statics Analysis
• Comparative statics is a form of sensitivity (or
what-if) analysis
– Commonly used method in economic analysis

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Comparative Statics Analysis
• Process of comparative statics analysis:
– state all the assumptions needed to construct the

model
– begin by assuming that the model is in
equilibrium
– introduce a change in the model, so a condition
of disequilibrium is created
– find the new point of equilibrium
– compare the new equilibrium point with the
original one

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Comparative Statics Analysis
Step 1
• assume all factors
except the price of
pizza are constant
• buyers’ demand and
sellers’ supply are
represented by lines
shown

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Comparative Statics Analysis

Step 2
• begin the analysis in
equilibrium as shown
by Q1 and P1

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Comparative Statics Analysis
Step 3
• assume that a new
study shows pizza to
be the most nutritious
of all fast foods
• consumers increase
their demand for pizza
as a result

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Comparative Statics Analysis
Step 4
• the shift in demand
results in a new
equilibrium price (P2)

• and a new equilibrium
quantity (Q2)

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Comparative Statics Analysis
Step 5
• comparing the new
equilibrium point with
the original one, we
see that both
equilibrium price and
quantity have
increased

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