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Market Forces: Demand And Supply

Samsung and Hynix Semiconductor to Cut Chip Production Sam Robbins, owner and CEO of PC Solution, arrived at the office and glanced at the front page of The Wall Street Journal waiting on his desk. One of the articles contained statements from executives of two of South Korea’s largest semiconductor manufactures (Samsung Electronics Company and Hynix Semiconductor),

Samsung and Hynix Semiconductor to Cut Chip Production (continued) Indicating that they would suspend all their memory chip production for one week. The article went on to say that another large semiconductor manufacturer was likely to follow suit. Collectively, these three chip manufacturer produce about 30 percent of the world’s basic semiconductor chips.

Samsung and Hynix Semiconductor to Cut Chip Production (continued) PC Solutions is a small but growing company that assembles PCs and sells them in the highly competitive market for “clones.” PC Solutions experienced 100 percent growth last year and is in the process of interviewing recent graduates in attempt to double its workforce. After reading the article, Sam picked up the phone and called a few of his business contacts to verify for himself the information contained in the Journal. Satisfied that the information was correct, he called the director of personnel, Jane Remark. What do you think they discussed?

Demand Market demand curve: a curve indicating the total quantity of a good all consumers are willing and able to purchase at each possible price, holding the price of related goods, income, advertising, and other variables constant.

The Demand Schedule For Product A Price Of product A Quantity of Product A Sold Average Consumer Income Advertising Expenditure Average Price of Product B 80 000 25 000 50 000 20 5 70 000 10 60 000 15 40 000 25 30 000 30 20 000 35 10 000 40

The Demand Curve Figure 2-1 Page 37. The demand curve.

Demand (continued) Change in quantity demanded: changes in the price of a good lead to a change in the quantity demanded of that good. This corresponds to a movement along a given demand curve.

Demand (continued) Change in demand: changes in variables other than the price of a good, such as income or price of another good, lead to a change in demand. This corresponds to a shift of entire demand curve.

Demand Shifter: Because: - Income, - Prices of related goods, - Advertising and consumer tastes, - Population, Consumer expectations. Figure 2-2 Page 38. Changes in demand

Demand Shifter (continued): INCOME: - Normal good: a good for which an increase (decrease) in income leads to an increase (decrease) in the demand for that good. - Inferior good: income leads to a decrease (increase) in the

Demand Shifter (continued): PRICES OF RELATED GOODS: - Substitutes: goods for which an increase (decrease) in the price of one good leads to an increase (decrease) in the demand for the other good. - Complements: goods for which an increase (decrease) in the price of one good leads to a decrease (increase) in the demand for the other good.

Advertising and Demand for Product A Figure 2-3 Page 40. Increase in advertising

The Demand Function Qdx =f (Px, Py, M, H) Qdx = a0 + a1 Px + a2 Py + a3 M + a4 H Qdx : the quantity demanded of good X f : function Px: the price of good X Py: the price of a related good M: income H: value of any other variable that affects demand

Linear Demand Function Qdx = a0 + a1Px + a2Py + a3M + a4H

Case: Qdx = 12000 – 3 Px + 4 Py – 1 M + 2 A M: income A: advertising - How much of good X do consumers purchase? - Are good X and Y substitutes or complements? - Is good X a normal or an inferior good?

Case: Qdx = 12000 – 3(200) + 4(15) – 1 (10000) + 2 (2000) = 5460

Consumer Surplus: The value consumers get from a good but do not have to pay for. Figure 2-5 Page 44. Consumer surplus

Supply Market supply: a curve indicating the total quantity of a good that all producers in a competitive market would produce at each price, holding input prices, technology, and other variables affecting supply constant.

Figure 2-6 Page 46 (Changes in Supply).

Supply (continued) Change in quantity supplied: changes in the price of a good lead to a change in the quantity supplied of that good. This corresponds to a movement along a given supply curve.

Supply (continued) Change in supply: changes in variables other than the price of a good, such as input prices or technological advances, lead to a change in supply. This corresponds to a shift of the entire supply curve.

Supply Shifters Affected by: - Input prices, - Technology or government regulations, - Number of firms, - Substitutes in production, - Taxes, - Producer expectations.

Supply Shifters (continued) A per unit tax Figure 2-7 Page 48

The Supply Function Qsx = f (Px, Pr, W, H) Qsx = b0 + b1 Px + b2 Pr + b3 W + b4 H Qsx: the quantity supplied of a good f: function Px: price of the good Pr: price of technologically related goods W: price of an input H: the value of some other variable that affects supply

Linear Supply Function Qsx = b0 + b1 Px + b2 Pr + b3 W + b4 H Qsx = -400 + 3Px

Producer Surplus: The amount producers receive in excess of the amount necessary to induce them to produce the good. Figure 2-9 Page 51

Market Equilibrium Qd = Qs Figure 2-10 Page 52. Surplus? Shortage?

Case: Qd = 10 – 2P Qs = 2 + 2P Determine the competitive equilibrium (Q=?; P=?)?

Price Restrictions And Market Equilibrium Price ceiling: the maximum legal price that can be charged in a market. Figure 2-11 Page 55

Price Restrictions And Market Equilibrium (continued) Price floor: the minimum legal price that can be charged in a market. Figure 2-12 Page 58

Comparative Statics (changes In Demand) Effect the increase in demand of rental cars as the consumer incomes are expected to rise by about 2.5 percent. Figure 2-13 Page 60.

Comparative Statics (changes In Supply) Effect higher input prices Figure 2-14 Page 62.

Homework: The demand for good X is given by: Qx = 1200 – 0.5 Px + 0.25 Py – 8 Pz + 0.1M Py = 5900 Pz = 90 M = 55000 a. Indicate whether goods Y and Z are substitutes or complements for good X. b. Is X an inferior or normal good? c. How many units of good X will be purchased when Px = 4910

Homework: The X Corporation produces a good X that is normal good. Its competitor the Y Corporation makes a substitute good that it markets under the name “Y”. Good Y is an inferior good. How will the demand for good X change if consumer incomes increase? How will the demand for good Y change if consumer income decrease? How will the demand for good X change if the price of good Y decrease? Is good Y a lower quality product than good X? Explain.

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