Managerial economics Business strategy Chapter 2 Market Forces: Demand and Supply Michael R Baye, Managerial Economics and Business Strategy, 3e. CThe McGraw-Hill Companies, Inc, 1999
Michael R. Baye, Managerial Economics and Business Strategy, 3e. ©The McGraw-Hill Companies, Inc. , 1999 Managerial Economics & Business Strategy Chapter 2 Market Forces: Demand and Supply
Overview I Market Demand Curve III Market Equilibrium a The demand function I Price restrictions Determinants of demand Consumer Surplus V. Comparative Statics IL. Market Supply Curve The Supply function Supply shifters Producer Surplus Michael R Baye, Managerial Economics and Business Strategy, 3e. CThe McGraw-Hill Companies, Inc, 1999
Michael R. Baye, Managerial Economics and Business Strategy, 3e. ©The McGraw-Hill Companies, Inc. , 1999 Overview III. Market Equilibrium IV. Price Restrictions V. Comparative Statics II. Market Supply Curve The Supply Function Supply Shifters Producer Surplus I. Market Demand Curve The Demand Function Determinants of Demand Consumer Surplus
Market demand curve Shows the amount of a good that will be purchased at alternative prices Law of demand The demand curve is downward sloping Ice D Quantity Michael R Baye, Managerial Economics and Business Strategy, 3e. CThe McGraw-Hill Companies, Inc, 1999
Michael R. Baye, Managerial Economics and Business Strategy, 3e. ©The McGraw-Hill Companies, Inc. , 1999 Market Demand Curve • Shows the amount of a good that will be purchased at alternative prices. • Law of Demand The demand curve is downward sloping. Quantity D Price
Determinants of demand Income Prices of substitutes Prices of complements Advertising Population Consumer expectations Michael R Baye, Managerial Economics and Business Strategy, 3e. CThe McGraw-Hill Companies, Inc, 1999
Michael R. Baye, Managerial Economics and Business Strategy, 3e. ©The McGraw-Hill Companies, Inc. , 1999 Determinants of Demand • Income • Prices of substitutes • Prices of complements • Advertising • Population • Consumer expectations
The demand function An equation representing the demand curve Qx=f(Px, Py, m, h,) a Q= quantity demand of good X - Px= price of good X a Py- price of a substitute good Y M=income -H= any other variable affecting demand Michael R Baye, Managerial Economics and Business Strategy, 3e. CThe McGraw-Hill Companies, Inc, 1999
Michael R. Baye, Managerial Economics and Business Strategy, 3e. ©The McGraw-Hill Companies, Inc. , 1999 The Demand Function • An equation representing the demand curve Qx d = f(Px , PY , M, H,) Qx d = quantity demand of good X. Px = price of good X. PY = price of a substitute good Y. M = income. H = any other variable affecting demand
Change in Quantity Demanded Price a to B: Increase in guantity demanded A 10 B Quantity Michael R Baye, Managerial Economics and Business Strategy, 3e. CThe McGraw-Hill Companies, Inc, 1999
Michael R. Baye, Managerial Economics and Business Strategy, 3e. ©The McGraw-Hill Companies, Inc. , 1999 Change in Quantity Demanded Price Quantity D0 4 7 10 6 A A to B: Increase in quantity demanded B
Change in Demand Price Do to d,: Increase in Demand 6 13 Quantity Michael R Baye, Managerial Economics and Business Strategy, 3e. CThe McGraw-Hill Companies, Inc, 1999
Michael R. Baye, Managerial Economics and Business Strategy, 3e. ©The McGraw-Hill Companies, Inc. , 1999 Price Quantity D0 D1 6 7 D0 to D1 : Increase in Demand Change in Demand 13
Consumer Surplus The value consumers get from a good but do not have to pay for Michael R Baye, Managerial Economics and Business Strategy, 3e. CThe McGraw-Hill Companies, Inc, 1999
Michael R. Baye, Managerial Economics and Business Strategy, 3e. ©The McGraw-Hill Companies, Inc. , 1999 Consumer Surplus: • The value consumers get from a good but do not have to pay for
I got a great deal! That company offers a lot of bang for the buck! Gateway 2000 provides good value Total value greatly exceeds total amount paid Consumer surplus is large Michael R Baye, Managerial Economics and Business Strategy, 3e. CThe McGraw-Hill Companies, Inc, 1999
Michael R. Baye, Managerial Economics and Business Strategy, 3e. ©The McGraw-Hill Companies, Inc. , 1999 I got a great deal! • That company offers a lot of bang for the buck! • Gateway 2000 provides good value. • Total value greatly exceeds total amount paid. • Consumer surplus is large
I got a lousy deal That car dealer drives a hard bargain! I almost decided not to buy it! They tried to squeeze the very last cent from me! · Total amount paid is close to total value Consumer surplus is low Michael R Baye, Managerial Economics and Business Strategy, 3e. CThe McGraw-Hill Companies, Inc, 1999
Michael R. Baye, Managerial Economics and Business Strategy, 3e. ©The McGraw-Hill Companies, Inc. , 1999 I got a lousy deal! • That car dealer drives a hard bargain! • I almost decided not to buy it! • They tried to squeeze the very last cent from me! • Total amount paid is close to total value. • Consumer surplus is low