1. Managerial Economics & Business Strategy
Chapter 2
Market Forces: Demand and Supply

2. Are we following? (number 4)
The demand for good X is given by
Research shows that the price of related goods are given by Py=$5,900 and that Pz=$90, while the average income of individuals consuming this product is M=$55,000.
Are good Y and Z substitutes or compliments for good X?
Is X an inferior or normal good?
How many units of good X will be purchased when Px=$4,910?
Determine the demand function and the inverse demand function for good X. Graph the demand curve for good X.

3. Consumer Surplus:
The value consumers get from a good but do not have to pay for.
Satisfaction you receive from not having to pay the highest price that you were ABLE and WILLING to pay

4. Consumer Surplus: The Discrete Case (price =$2.00)
The value received but not
paid for. Consumer surplus =
(8-2) + (6-2) + (4-2) = $12. 10 8 6 4 2 D
Quantity

5. Consumer Surplus: The Continuous Case (price =$2.00)
Value
of 4 units = $24 10 8 6 4
Expenditure on 4 units = $2 x 4 = $8 2 D
Quantity

6. Can we do it?
Sally sells lemonade for $2.00 per glass. If we know that the demand curve is Qx = 20 – 2P what is the consumer surplus??
What is price where Q = 0? 10
What is the quantity sold at P=2?
16 units
What is the consumer surplus?
½ (10-2)*(16-0) = 64

7. What??? P
CS=½(16-0)*(10-2)= 64 10 2 D 16 Q

8. Market Supply Curve
The supply curve shows the amount of a good that will be produced at alternative prices.
Law of Supply
As the price increases (decreases) firms are able and willing to produce more (less)
Positive slope
Price
Quantity S0

9. Change in Quantity Supplied
Price
Quantity S0
A to B: Increase in quantity supplied B 20 10 A 10 5

10. Change in Supply S0 to S1: Increase in supply Price S0 S1 8 6 5 7
Quantity S0 S1 8 5 7 6

11. Supply Shifters Input prices Technology or government regulations
Number of firms
Entry
Exit
Taxes
Excise tax (flat tax)per unit tax
Ad valorem tax  percentage tax (sales tax)
Producer expectations

12. What happens to supply? (number 2)
Good X is produced in a competitive market using input A. Explain what would happen to the supply of good X in each of the following situations:
The price of input A increases
The supply of good X will decrease (shift to the left).
An excise tax of $1 is imposed on good X
The supply of good X will decrease.
How??
Shift vertically up by exactly $1 at each level of output.
An ad valorem tax of 5% is imposed on good X
Supply curve will rotate counter-clockwise.
A technological change reduces the cost of producing additional units of good X
The supply curve for good X will increase (shift to the right)

13. The Supply Function The functional form of the supply curve:
QxS = f(Px , PR ,W, H,)
QxS = quantity supplied of good X.
Px = price of good X.
PR = price of a production substitute.
W = price of inputs (e.g., wages).
H = other variable affecting supply.

14. Inverse Supply Function
Linear supply curve is Qx = f (P….)
BUT…when we graph it we use price as a function of quantity supplied.
Example:
Supply Function
Qxs = Px
Inverse Supply Function:
2Px = 10 + Qxs
Px = Qxs

15. Producer Surplus
The amount producers receive in excess of the amount necessary to induce them to produce the good.
Price S0 P* Q*
Quantity

16. Market Equilibrium Balancing supply and demand QxS = Qxd
Interaction of supply and demand determines the equilibrium price