Managerial

Economics

http://www.free-powerpoint-templates-design.com
According to Mick
Jagger* & the Rolling
Stones
“You can’t always
get what you want”
Agenda Style
01 Contents
Get a modern PowerPoint Presentation that is beautifully
designed. I hope and I believe that this Template will your Time.

02 Contents
Get a modern PowerPoint Presentation that is beautifully
designed. I hope and I believe that this Template will your Time.

03 Contents
Get a modern PowerPoint Presentation that is beautifully
designed. I hope and I believe that this Template will your Time.

04 Contents
Get a modern PowerPoint Presentation that is beautifully
designed. I hope and I believe that this Template will your Time.
Something
Interesting is
Happening
Bitcoin
◦The world biggest bank with no cash.
Uber
◦The world largest taxi company, owns no vehicle.
Facebook
◦The world most popular media with no content.
Alibaba
◦The world most valuable retailer has no inventory
Airbnb
◦The worlds largest accommodation provider owns no
real estate.
What’s all the buzz about 5G?
Will it really change our lives?
Speed:
5G will allow for 10X faster speed than 4G. 10 megabits
per second to 100 megabits
per second, download a movie on your phone in seconds
rather than minutes.

Real-time communication:
5G is expected to reduce latency from around 20
milliseconds for today’s networks to about 1 millisecond
everything in the cloud will be more responsive and video
calls will be a lot better
Connection Density:
5G allows for many more connected devices per
square kilometer—1 million compared to just 2,000 for
4G. (more cellular base stations will be needed)

Energy Efficiency:
Your phone’s battery should live for over 10 years
compared. Allows to transmit more data without using more
resources
How 5G Change the Economy
CLOUD
COMPUTING
How 5G Change the Economy
 How 5G Change the Economy
5 G technology has the potential to transform
our society
- Industrial Internet of Things will permit
manufacturers to use more robots and
machines communicating in real time to
produce more efficiently—as much as
an 82%
- In the mining, oil and gas sector, robots
are likely to do more of the remote
location work.
5 G technology has the potential to transform our
society
With 5G allowing for real-time control
of drones, inventories could be
restocked and packages delivered to
remote locations, saving time and
reducing costs.

Autonomous vehicles
Smart cities will be better able to manage public
health and safety.
- emergency services will respond faster to
incidents.
- smart meters, homes and businesses will use
water and electricity more efficiently and utility
providers will refine their peak/non-peak
pricing plans using consumption data to better
forecast energy need
- using energy more efficiently will decrease
pollution.
Fundamental
of
Managerial
Economics
A person who directs the efforts of
others, including those who delegate
tasks within an organization such as
Manager
a firm, a family, or a club;
Purchase inputs to be used in the
production of goods and services
such as the output of a firm,
food for the needy, or shelter for the
homeless;
are in charge of making other
decisions, such as product price or
quality.
The science of making decisions in Economics
the presence of scare resources.

Economic decisions thus involve the

allocation of scarce resources, and a
manager’s task is to allocate
resources so as to best meet the
manager’s goals.
The study of how to direct scarce Managerial
resources in the way that most Economics
efficiently achieves a managerial
goal.

The key to making sound

decisions is to know what
information is needed to make
an informed decision and then to
collect and process the data.
Manager
◦A person who directs resources to achieve a
stated goal.
Economics
◦The science of making decisions in the
presence of scare resources.
Managerial Economics
◦The study of how to direct scarce resources
in the way that most efficiently achieves a
managerial goal.
Infographic Style
Content Here
You can simply impress your
audience and add a unique
zing and appeal to your
Presentations.
99%
Content Here
You can simply impress your
audience and add a unique
zing and appeal to your
Presentations.
85%
Content Here
You can simply impress your
audience and add a unique
zing and appeal to your
Presentations.
67%
Content Here
You can simply impress your
audience and add a unique
zing and appeal to your
Presentations.
43%
 Infographic Style
Your Text Your Text
Get a modern Get a modern
PowerPoint PowerPoint
Presentation Presentation
that is that is
beautifully beautifully
designed. designed.

2015 2017 2019

2016 2018
Your Text Your Text Your Text

Get a modern Get a modern Get a modern

PowerPoint PowerPoint PowerPoint
Presentation Presentation Presentation
that is that is that is
beautifully beautifully beautifully
designed. designed. designed.
 Infographic Style

Content Here Content Here Content Here Content Here

You can simply impress your You can simply impress your
audience and add a unique zing audience and add a unique zing
and appeal to your Presentations. Content Here and appeal to your Presentations.
You can simply impress your
audience and add a unique zing
and appeal to your Presentations.

Content Here Content Here

Content Here Content Here

You can simply impress your You can simply impress your
audience and add a unique zing audience and add a unique zing
and appeal to your Presentations. and appeal to your Presentations.
THE ECONOMICS OF
EFFECTIVE
MANAGEMENT
Identify Goals and Constraints
Sound decision making involves having well-
defined goals.
Example: If your goal is to maximize
your grade in MANECON rather than maximize
your overall grade point average, your study
habits will differ accordingly.

In striking to achieve a goal, we often face

constraints.
Constraints are an product of scarcity.
Recognize the Nature and Importance of
Profits
Economic versus Accounting Profit
Accounting Profit - is the total amount of money
taken in from sales (total revenue, or price times
quantity sold) minus the dollar/peso cost of
producing goods or services. Reported on the
firm’s income statement
Economic Profit - are the difference between the
total revenue and the total opportunity cost of
producing the firm’s goods or services.
Recognize the Nature and Importance of
Profits
Opportunity cost - cost of the explicit and implicit
resources that are forgone when a decision is
made.

Explicit cost – accounting cost of resources

needed to produced goods and services

Implicit cost - cost of the resources that are

forgone when a decision is made.
+ Opportunity Cost of an
Additional Year of School
Explicit Cost Implicit Cost
Tuition $7,000 Forgone $35,000
salary
Books and 1,000
supplies
Computer 1,500
Total explicit $9,500 Total implicit $35,000
cost cost

Total opportunity cost = Total explicit cost + Total implicit

cost = $44,500
+
Accounting Profit versus
Economic Profit
Value of increase in lifetime earnings $100,000
Explicit cost:
Tuition –40,000
Interest paid on student loan –4,000
Accounting profit $56,000
Implicit cost:
Income forgone during two years –57,000
spent in school
Economic profit –1,000
+ Example: Economic profit vs.
accounting profit
The equilibrium rent on office space has
just increased by $500/month.
Compare the effects on accounting profit
and economic profit if
a.you rent your office space
b. you own your office space
+ Answers: Economic profit vs.
accounting profit
The rent on office space increases $500/month.
a. You rent your office space.
Explicit costs increase $500/month.
Accounting profit & economic profit each
fall $500/month.
b. You own your office space.
Explicit costs do not change, so accounting profit
does not change. Implicit costs increase
$500/month (opp. cost of using your space instead
of renting it), so economic profit falls by
$500/month.
Recognize the Nature and Importance of
Profits
Profits as Signal
- Profits signal to resource holders where
resources are most highly valued by society.
Resources will flow into industries that are most
highly valued by society.
+ The Five Forces Framework
+ The Five Forces Framework
Entry
heightens competition and reduces the margins
of existing firms in a wide variety of industry
settings.
the ability of existing firms to sustain profits
depends on how barriers to entry affect the
ease with which other firms can enter the
industry.
Example: (Wendy’s entered the fast-food
industry in the 1970s after its founder, Dave
Thomas, left KFC);
+ The Five Forces Framework
Power of Input Suppliers
Industry profits tend to be lower when suppliers
have the power to negotiate favorable terms for
their inputs.

Supplier power tends to be low when inputs are

relatively standardized and relationship-specific
investments are minimal, input markets are not
highly concentrated, or alternative inputs are
available with similar marginal productivities per
dollar spent
+ The Five Forces Framework
Power of Buyers
Industry profits tend to be lower when
customers or buyers have the power to
negotiate favorable terms for the products or
services produced in the industry.

Buyer power tends to be lower in industries

where the cost to customers of switching to
other products is high.
+ The Five Forces Framework
Industry Rivalry

The sustainability of industry profits also

depends on the nature and intensity of rivalry
among firms competing in the industry.

Rivalry tends to be less intense (and hence the

likelihood of sustaining profits is higher) in
concentrated industries—that is, those with
relatively few firms.
+ The Five Forces Framework
Substitute and Complements
The level and sustainability of industry profits
also depend on the price and value of
interrelated products and services.

Example: Microsoft’s profitability in the market

for operating systems is enhanced by the
presence of complementary products ranging
from relatively inexpensive computer hardware
to a plethora of Windows-compatible application
software.
Understand Incentives

Changes in profits provide an incentive to resource

holders to alter their use of resources.

Within a firm, incentives affect how resources are

used and how hard workers work. To succeed as a
manager, you must have a clear grasp of the role
of incentives within an organization such as a firm
and how to construct incentives to induce maximal
effort from those you manage.
Understand the Market
Producer–producer rivalry - this disciplining device
functions only when multiple sellers of a product
compete in the marketplace. Firms that offer the
best-quality product at the lowest price earn the
right to serve the customers.
Government and the Market - When agents on
either side of the market find themselves
disadvantaged in the market process, they
frequently attempt to induce government to
intervene on their behalf.
Understand the Market
Consumer–producer rivalry occurs because of the
competing interests of consumers and producers.
Consumers attempt to negotiate or locate low
prices, while producers attempt to negotiate high
prices.
Consumer–consumer rivalry reduces the
negotiating power of consumers in the
marketplace. When limited quantities of goods are
available, consumers will compete with one
another for the right to purchase the available
goods.
Recognize Time Value of Money
Present Value Analysis is the amount that would
have to be invested today at the prevailing
interest rate to generate the given future value.

For example, the present value of $100.00 in 10 years

if the interest rate is at 7 percent is $50.83, since
Recognize Time Value of Money
Present Value Analysis
Present Value of Payment

Net Present Value - the present value of the income

stream generated by a project minus the current cost of
the project.
Recognize Time Value of Money
Net Present Value Example
The manager of Automated Products is
contemplating the purchase of a new machine that
will cost $300,000 and has a useful life of five
years. The machine will yield (year-end) cost
reductions to Automated Products of $50,000 in
year 1, $60,000 in year 2, $75,000 in year
3, and $90,000 in years 4 and 5. What is the
present value of the cost savings of the machine
if the interest rate is 8 percent? Should the
manager purchase the machine?
Recognize Time Value of Money
Net Present Value: Answer:
By spending $300,000 today on a new machine,
the firm will reduce costs by $365,000 over
five years. However, the present value of the cost
savings is only

Consequently, the net present value of the new machine

is
Since the net present value of the machine is negative,
the manager should not purchase the machine.
Recognize Time Value of Money
Present Value of Indefinitely Lived Assets
Recognize Time Value of Money
Present Value of Indefinitely Lived Assets
Examples of such an asset include perpetual
bonds and preferred stocks. Each of these assets
pays the owner a fixed amount at the end of each
period, indefinitely. Based on the above formula,
the value of a perpetual bond that pays the owner
$100 at the end of each year when the interest rate
is fixed at 5 percent is given by
Recognize Time Value of Money
Profit Maximization
Maximizing profits means maximizing the value of
the firm, which is the present value of
current and future profits.
Recognize Time Value of Money
Profit Maximization
Example:
Suppose the interest rate is 10 percent and the firm is
expected to grow at a rate of 5 percent for the
foreseeable future. The firm’s current profits are $100
million.
(a) What is the value of the firm (the present value of its
current and future earnings)?
(b) What is the value of the firm immediately after it
pays a dividend equal to its current profits?
Recognize Time Value of Money
Profit Maximization
Example:
Suppose the interest rate is 10 percent and the firm is
expected to grow at a rate of 5 percent for the
foreseeable future. The firm’s current profits are $100
million.
(a) What is the value of the firm (the present value of its
current and future earnings)?
(b) What is the value of the firm immediately after it
pays a dividend equal to its current profits?
Recognize Time Value of Money
Profit Maximization
Answer:
a. The value of the firm
Recognize Time Value of Money
Profit Maximization
Answer:

The value of the firm on the ex-dividend date is this

amount ($2,200 million) less the current profits
paid out as dividends ($100 million), or $2,100
million. Alternatively, this may be calculated as
Use Marginal Analysis
Marginal benefit – the change in total benefits
arising from a change in the managerial control.

Marginal cost - the change in total costs arising

from a change in the managerial control.

Net Benefits = Total Benefits - Total Costs

Profits = Revenue - Costs
Use Marginal Analysis
Marginal Principle
To maximize net benefits, the managerial control
variable should be increased up to the point where
MB = MC.
MB > MC means the last unit of the control
variable increased benefits more than it increased
costs.
MB < MC means the last unit of the control
variable increased costs more than it increased
benefits.
Use Marginal Analysis
The Theory of
the Firm
Firm – is an organization that combines
and organizes resources for the
purpose of producing goods and
services for sale.
The Firm’s Objective
Firm – is an organization that combines
and organizes resources for the purpose
of producing goods and services for sale.

The economic goal of the firm is to

maximize profits.
Production Function
Production Function
Increasing, Diminishing and
Negative Marginal Returns
Increasing Diminishing Negative
Q Marginal Marginal Marginal
Returns Returns Returns

Q=F(K,L)

AP
L
MP
Cost
Cost Analysis
Types of Costs
Short-Run
• Fixed costs (FC)
• Sunk costs
• Short-run variable costs
(VC)
• Short-run total costs (TC)
Long-Run
• All costs are variable
• No fixed costs
Total and Variable Cost

C(Q): Minimum total cost of $

producing alternative levels C(Q) = VC + FC
of output:
C(Q) = VC(Q) + FC VC(Q)

VC(Q): Costs that vary with

output. FC

FC: Costs that do not vary

with output Q
Some definitions
Average Total Cost
ATC = AVC + AFC $
ATC
ATC = C(Q)/Q ATC
AVC
Average Variable Cost
AVC = VC(Q)/Q
Average Fixed Cost MR
AFC = FC/Q
Marginal Cost
MC = DC/DQ AFC

Q
Fixed and Sunk Costs
FC: Costs that do not change
as output changes. $
C(Q) = VC + FC
Sunk Cost: A cost that is
forever lost after it has been VC(Q)
paid.

Decision makers should FC

ignore sunk costs to maximize
profit or minimize losses
Q
Fixed Cost
Q0(ATC-AVC)
MC
$ = Q0 AFC ATC
= Q0(FC/ Q0) AVC
= FC

ATC
AFC Fixed Cost
AVC

Q0 Q
Variable Cost

Q0AVC MC
$
ATC
= Q0[VC(Q0)/ Q0]
AVC
= VC(Q0)

AVC
Variable Cost Minimum of AVC
Q0 Q
Total Cost
Q0ATC
MC
$
= Q0[C(Q0)/ Q0] ATC

= C(Q0) AVC

ATC

Total Cost Minimum of ATC

Q0 Q
 Economies of scale refer
to the property whereby
long-run average total cost
falls as the quantity of
output increases.
Diseconomies of scale
refer to the property
whereby long-run average
total cost rises as the
quantity of output increases.
Revenue
Revenue
Total revenue – the total amount received from
selling a given output
TR = P x Q
Average Revenue – the average amount received
from selling each unit
AR = TR / Q
Marginal revenue – the amount received from selling
one extra unit of output
MR = TRn – TR n-1 units
Profit
Profit

Profit = TR – TC
Assumption that firms aim to maximize profit
Profit maximising output would be where MC =
MR
Profit

Why? If Assume
the firm output
were tois at
Cost/Revenue The
Ifproduce process
the firmthe continues
decides thto
MC 100
MC units.
– The 104
The
cost MC unit,
of of
for
produce each
MR –
onesuccessive
themoreaddition
unit
this last unit the
producing would100 th –
cost
unitproducing
toproduced.
total ONE
revenue asit
150 the
more101 st
to – the
produce addition
than
unit
extra
Provided is 20.
a result unit
the of
MC is18,
145 toearns
total cost
in isofnow
revenue (-105)
lessproduction
The than
producing the
MR received MR
oneit from
140 the
thisaddition
would to total
reduce total
will be is
more
selling worth
unit ofthe
andthat 100 th unit
Reduces
total
revenue
profit 140 –
so would firm
not
expanding
output output
–tothe as–
price
Total
120
profit by beisadd
will 150.
worth 128 The firm
profit.
producing. can
it the difference
added
Added to this isaddreceived
worth from
theexpanding
difference of
to total Added amount The profit
between maximising
profit
profit to total the
output. costthe
selling that
and two
the is
extra
profit output
ADDEDunit.
revenue istowhere
total MR
received profit=
from
40
MC that 100th unit to
30
profit (130)
20
18 MR

100 101 102 103 104 Output

 The Basic Decision
Making Units
Household

Firm

Entrepreneur
Markets and Competition
A market is a group of buyers and sellers of a
particular product.
A perfectly competitive market:
◦all goods exactly the same
◦buyers & sellers so numerous that no one can
affect market price – each is a “price taker”
(assuming that markets are perfectly
competitive)
The Circular Flow of Economic Activity

• The circular flow of

economic activity shows
the connections between
firms and households in
input and output markets.
 Input Markets and Output Markets

• Payments flow in the opposite direction as

the physical flow of resources, goods, and
services (counterclockwise).
The Circular Flow Diagram
The Circular Flow of Economic Activity

Diagrams like this one show the circular flow

of economic activity, hence the name circular
flow diagram. Here goods and services flow
clockwise: Labor services supplied by
households flow to firms, and goods and
services produced by firms flow to
households.
Payment (usually money) flows in the
opposite (counterclockwise) direction:
Payment for goods and services flows from
households to firms, and payment for labor
services flows from firms to households.
Note: Color Guide—In Figure 3.1 households
are depicted in blue and firms are depicted in
red. From now on all diagrams relating to the
behavior of households will be blue or shades
of blue and all diagrams relating to the
behavior of firms will be red or shades of red.
Input Markets
• The labor market, in which households
supply work for wages to firms that
demand labor.
• The capital market, in which households
supply their savings, for interest or for
claims to future profits, to firms that
demand funds to buy capital goods.
• The land market, in which households
supply land or other real property in
exchange for rent.
Demand
Demand comes from the behavior of buyers.
Demand is the quantity of the good that buyers
are willing to purchase.
Quantity demand is the quantity of the good that
buyers are willing and able to purchase.
Market demand: total quantity of the goods that
the buyers are willing and able to purchase at
each possible prices.
The Law of Demand
• The law of demand states that there is
a negative, or inverse, relationship
between price and the quantity of a good
demanded and its price.

• This means that demand curves slope

downward.
 Helen’s Demand Schedule & Curve
Price of Price Quantity
Lattes of of lattes
$6.00 lattes demanded
$0.00 16
$5.00
1.00 14
$4.00 2.00 12
$3.00 3.00 10
$2.00 4.00 8
5.00 6
$1.00
6.00 4
$0.00
Quantity
0 5 10 15 of Lattes
Demand in Product/Output Markets
From Household Demand to Market Demand

 FIGURE 3.5 Deriving Market Demand

from Individual Demand Curves
 Determinants of Demand
The price of the product.
The income available to the
household.
The household’s number of
buyers.

The prices of related products

available to the household.
The household’s tastes and
preferences.
The household’s expectations
about future income, wealth, and
prices.
Change in Quantity Demanded

Own price Price A to B: Increase in quantity demanded

decrease A
by 4 10

B
6

D0

4 7
Quantity
 Demand Curve Shifters: # of buyers

P Suppose the number

$6.00 of buyers increases.
Then, at each price,
$5.00
quantity demanded
$4.00 will increase
(by 5 in this example).
$3.00
$2.00
$1.00
$0.00 Q
0 5 10 15 20 25 30
Demand Curve Shifters: income
Demand for a normal good is positively related
to income.
◦An increase in income causes increase
in quantity demanded at each price, shifting
the D curve to the right.
(Demand for an inferior good is negatively
related to income. An increase in income shifts
D curves for inferior goods to the left.)
Demand Curve Shifters: prices of related
goods
Two goods are substitutes if an increase in the
price of one causes an increase in demand for
the other.
Example: pizza and hamburgers.
An increase in the price of pizza increases
demand for hamburgers,
shifting hamburger demand curve to the right.
Other examples: Coke and Pepsi, laptops and
desktop computers, compact discs and music
downloads
Demand Curve Shifters: prices of related
goods
Two goods are complements if an
increase in the price of one causes a fall
in demand for the other.
Example: computers and software.
If price of computers rises, people buy
fewer computers, and therefore less
software. Software demand curve shifts
left. Other examples: college tuition
and textbooks, bagels and cream
cheese, eggs and bacon
Demand Curve Shifters: tastes
Anything that causes a shift in tastes
toward a good will increase demand
for that good and shift its D curve to
the right.
Example:
The Atkins diet became popular in the
’90s, caused an increase in demand
for eggs, shifted the egg demand
curve to the right.
Demand Curve Shifters: expectations
Expectations affect consumers’ buying
decisions.
Examples:
◦If people expect their incomes to rise, their
demand for meals at expensive restaurants
may increase now.
◦If the economy turns bad and people worry
about their future job security, demand for
new autos may fall now.
Summary: Variables That Affect Demand
Variable A change in this
variable…
Price …causes a movement
along the D curve
No. of buyers …shifts the D curve
Income …shifts the D curve
Price of
related goods …shifts the D curve
Tastes …shifts the D curve
Expectations …shifts the D curve
+A C T I V E L E A R N I N G 1:
Demand curve
Draw a demand curve for music downloads.
What happens to it in each of the following
scenarios? Why?
A. The price of iPods falls
B. The price of music
downloads falls
C. The price of compact
discs falls
A
+ C T I V E L E A R N I N G 1:
A. price of iPods falls
Price of Music downloads
music and iPods are
down- complements.
loads
A fall in price of
iPods shifts the
P1
demand curve for
music downloads
to the right.
D1 D2

Q1 Q2 Quantity of
music downloads
+ A C T I V E L E A R N I N G 1:
B. price of music downloads falls
Price of
music
down-
loads The D curve
does not shift.
Move down along
P1
curve to a point with
P2 lower P, higher Q.

D1

Q1 Q2 Quantity of
music downloads
+ A C T I V E L E A R N I N G 1:
C. price of CDs falls
Price of CDs and
music music downloads
down-
are substitutes.
loads
A fall in price of CDs
shifts demand for
P1
music downloads
to the left.

D2 D1

Q2 Q1 Quantity of
music downloads
 Supply
Supply comes from the behavior of
sellers.
The quantity supplied of any good is
the amount that sellers are willing and
able to sell at any given prices
 Market supply: the total quantity of
of goods that the seller are willing and
able to sell at any given prices
The Law of Supply
• The law of supply states
that there is a positive
relationship between
price and quantity of a
good supplied.
• This means that supply
curves typically have a
positive slope.
The Law of Supply
• The law of supply states
that there is a positive
relationship between
price and quantity of a
good supplied.
• This means that supply
curves typically have a
positive slope.
 Starbucks’ Supply Schedule & Curve

Price Quantity
P of of lattes
$6.00 lattes supplied
$0.00 0
$5.00
1.00 3
$4.00
2.00 6
$3.00 3.00 9
$2.00 4.00 12
5.00 15
$1.00
6.00 18
$0.00 Q
0 5 10 15
 Determinants of Demand
The price of the product.
The price of required inputs
(labor, capital, and land),
The technologies that can be
used to produce the product,

The products number of sellers

The sellers expectations about
future supply, and prices of the
products.
 Change in Quantity Supplied

Price A to B: Increase in quantity supplied

Own price
increase S0
by 10 B
20

A
10

5 10 Quantity
 Supply Curve Shifters: input prices

P Suppose the
$6.00 price of milk falls.
At each price,
$5.00
the quantity of
$4.00 Lattes supplied
will increase
$3.00
(by 5 in this
$2.00 example).
$1.00
$0.00 Q
0 5 10 15 20 25 30 35
Supply Curve Shifters: technology
Technology determines how much inputs are
required to produce a unit of output.
A cost-saving technological improvement has
same effect as a fall in input prices, shifts the S
curve to the right.
Supply Curve Shifters: # of
sellers
An increase in the number of sellers increases the
quantity supplied at each price, shifts the S curve
to the right.
Supply Curve Shifters: expectations
Suppose a firm expects the price of the
good it sells to rise in the future.
The firm may reduce supply now, to
save some of its inventory to sell later at
the higher price.
This would shift the S curve leftward.
Summary: Variables That Affect Supply
Variable A change in this
variable…
Price …causes a movement
along the S curve
Input prices …shifts the S curve
Technology …shifts the S curve
No. of sellers …shifts the S curve
Expectations …shifts the S curve
+ A C T I V E L E A R N I N G 2:
Supply curve
Draw a supply curve for tax
return preparation software.
What happens to it in each
of the following scenarios?
A. Retailers cut the price of the software.
B. A technological advance
allows the software to be
produced at lower cost.
+ A C T I V E L E A R N I N G 2:
A. fall in price of tax return software
Price of
tax return
S1 The S curve
software
does not shift.
P1 Move down
along the curve
P2 to a lower P
and lower Q.

Q2 Q1 Quantity of tax
return software
114
+ A C T I V E L E A R N I N G 2:
B. fall in cost of producing the software
Price of
tax return The S curve
software S1 S2
shifts to the
right:
P1
at each price,
Q increases.

Q1 Q2 Quantity of tax
return software
Equilibrium Level
+
Supply and Demand Together

P D S Equilibrium:
$6.00 P has reached
$5.00 the level where
$4.00
quantity supplied
equals
$3.00 quantity demanded
$2.00
$1.00
$0.00 Q
0 5 10 15 20 25 30 35
+ Equilibrium price:
The price that equates quantity supplied with
quantity demanded
P D S
$6.00 P QD QS
$5.00 $0 24 0
1 21 5
$4.00
2 18 10
$3.00
3 15 15
$2.00 4 12 20
$1.00 5 9 25
$0.00 6 6 30
Q
0 5 10 15 20 25 30 35
+ Surplus:
when quantity supplied is greater than
quantity demanded
P D S Facing a surplus,
$6.00
Surplus
sellers try to increase sales by
$5.00 cutting the price.
$4.00 This causes
QD to rise and QS to fall…
$3.00
…which reduces the
$2.00
surplus.
$1.00
$0.00 Q
0 5 10 15 20 25 30 35
+ Shortage:
when quantity demanded is greater than
quantity supplied
P D S Example:
$6.00 If P = $1,
$5.00 then
$4.00 QD = 21 lattes
and
$3.00
QS = 5 lattes
$2.00 resulting in a
$1.00 shortage of 16 lattes
$0.00 Shortage
Q
0 5 10 15 20 25 30 35
+ Three Steps to Analyzing Changes in Eq’m

To determine the effects of any event,

1. Decide whether event shifts S curve,
D curve, or both.
2. Decide in which direction curve shifts.
3. Use supply-demand diagram to see
how the shift changes eq’m P and Q.
+
EXAMPLE: The Market for Hybrid Cars
P
S1
price of hybrid
cars

P1

D1
Q
Q1
quantity of
hybrid cars
+ EXAMPLE 1: A Change in Demand
P
S1
Notice:
When P rises, P2
producers supply
a larger quantity P1
of hybrids, even
though the S curve
has not shifted. D1 D2
Q
Q1 Q2
+ EXAMPLE 2: A Change in Supply
P
S1 S2
EVENT: New
technology
reduces cost of P1

producing hybrid P2

cars. D1
Q
Q1 Q2
+ EXAMPLE 3: A Change in Both Supply
and Demand
P
S1 S2
EVENTS:
price of gas rises AND
new technology reduces
production costs P1
P2

D1 D2
Q
Q1 Q2
+ A C T I V E L E A R N I N G 3:
Changes in supply and demand
Use the three-step method to analyze the
effects of each event on the equilibrium price
and quantity of music downloads.
Event A: A fall in the price of compact discs
Event B: Sellers of music downloads negotiate a
reduction in the royalties they must pay for each
song they sell.
Event C: Events A and B both occur.
+ A C T I V E L E A R N I N G 3:
A. fall in price of CDs
P
S1
STEPS The market
1. D curve shifts P1 for music
downloads
2. D shifts left P2

3. P and Q both
fall.
D2 D1
Q
Q2 Q1
+ A C T I V E L E A R N I N G 3: B.
fall in cost of royalties
P
S1 S2
STEPS
1. S curve shifts P1 The market
for music
2. S shifts right P2 downloads
3. P falls,
Q rises.
D1
Q
Q1 Q2
Quantitative
Demand
and
Supply
Analysis
Demand Function
Solution:
Price = 20 and 18 pesos
A.
Qd = 200 – 10P
Qd = 200 – 10(20)
Qd = 0
B.
Qd = 200 – 10P
Qd = 200 – 10(18)
Qd = 200 – 180
Qd = 20
Demand Function
If Price is unknown?
Example:
Qd = 20
Solution:
Qd = 200 – 10P
20 = 200 – 10P
10P = 200 – 20
10P = 180
10P/10 = 180/10
P = 18
Demand Function
If Price is unknown?
Example:
Qd = 20
Solution:
Qd = 200 – 10P
20 = 200 – 10P
10P = 200 – 20
10P = 180
10P/10 = 180/10
P = 18
Demand Function
A general equation representing the demand curve
Qxd = f(Px ) - change in quantity demanded
Qxd = f( PY , M, H,) – change in demand
Qxd = quantity demand of good X
PY = price of a related good Y.
- Substitute good (+)
- Complement good (-)
M = income.
- Normal good (+)
- Inferior good (-)
H = any other variable affecting demand.
Demand Function
A general equation representing the demand curve
Example: Qxd = 1,200 - 3Px
Where:
Qxd = quantity demand of good X
Px = price of good X
If Px = 200 and 300

Qxd = 1,200 – 3(200) = 600

Qxd = 1,200 – 3(300) = 300
Qxd = decrease by 300
Demand Function
Example: Qxd = 1,200 - 3Px + 4 PY - 1M + 2A
Where:
Qxd = quantity demand of good X.
Px = price of good
PY = price of a related good
M = income
A = advertisement
Demand Function
Example: Qxd = 1,200 - 3Px + 4 PY - 1M + 2A
If:
Px = 200 PY = 15 M = 10,000
A =2,000

Qxd = 1,200 – 3(200) + 4 (15) -

1(10,000) + 2(2000)
= 5,460
Supply Function
-Mathematical equation, which consist of two
variables:
-Quantity supply (Qs) the dependent variable
-Price (P) the independent variable
Supply Equation: Qs = -500+50P
-500 is the quantity w/c supplier does not want to
sell at a price lower than P10
Supply Function
Example:
P = 10 and 15
A. Qs = -500+50P
Qs = -500+50(10)
Qs = _500+500
Qs= 0
B. Qs= -500+50(P)
Qs= -500+50(15)
Qs= -500+750
Qs = 250
Supply Function
If the price is unknown
If Price is unknown
Equation: -500 + 50P
Example: Qs = 250
Qs = -500 + 50P
250 = -500 + 50P
500 + 250 = 50P
750 = 50P
15 = P
Price Equilibrium
-Is the price level that both buyers and sellers
agree to have transaction in the market
Equation:
Qs = Qd
-22 + 11P 83 – 4P
Transposing
Qd = 83 + 22 = Qs =11P+4P
Qd = 105 Qs= 15P
105 = 15P
105/15 = 7
Price Equilibrium
Qd = Qs
83 – 4P = -22 + 11P
83 + 22 = 11P + 4P
105 = 15P
7=P
Quantity equilibrium
Qd = 83 – 4(7) = Qs = -22 + 11(7)
83 – 28 = -22 + 77
55 = 55
Supply, Demand and
Government Policies
+
Supply, Demand, and Government
Policies
In a free, unregulated market system,
market forces establish equilibrium
prices and exchange quantities.
One of the things government can do
is to set price controls when the market
price is seen as unfair to either buyers
or sellers.
Price Ceiling
-Republic Act 7581, which is known as the
Price Act was approved to help the
government in the implementation of price
control on basic commodities.
-National Price Coordinating Council – was
formed and its objective and function is to
guard and monitor prices after the
announcement of a price ceiling.
+
Price Ceilings & Price Floors

Price Ceiling
A legally established maximum price at which
a good can be sold. (Rent Controls)
Price Floor
A legally established minimum price at which
a good can be sold. (Price Supports for
Agriculture)
+
Price Ceilings
Two outcomes are possible when the
government imposes a price ceiling:
 The price ceiling is not binding if set above
the equilibrium price.
The price ceiling is binding if set below the
equilibrium price, leading to a shortage.
Binding means that there is an economic
impact.
A Price Ceiling That Is Binding...

Price of
Ice-Cream
Cone
Supply

Equilibrium
price

$3

2 Price
ceiling
Shortage
Demand

0 75 125 Quantity of
Quantity Quantity Ice-Cream
supplied demanded Cones
 A Price Ceiling That Is Not Binding...
Price of
Ice-Cream
Cone
Supply

$4 Price
ceiling

Equilibrium
price

Demand

0 100 Quantity of
Equilibrium Ice-Cream
quantity Cones
+
Effects of Price Ceilings

A binding price ceiling creates ...

 shortages because QD > QS.
Example: Gasoline shortage of the 1970s
 nonprice rationing
Examples: Long lines, Discrimination by
sellers
 The Price Ceiling on Gasoline Is
Not Binding...
Price of
Gasoline

1. Initially, Supply
the
price ceiling
is not
binding... $4 Price
ceiling

P1

Demand

0 Quantity of
Q1 Gasoline
 The Price Ceiling on Gasoline Is
Binding...
Price of S2 2. …but
Gasoline when supply
falls...
S1
P2
Price
ceiling

P1 3. …the price
ceiling becomes
4. …resulting binding...
in a shortage.

Demand

0 Quantity of
Q1 Gasoline
+ Price Floors
When the government imposes a
price floor, two outcomes are
possible.
The price floor is not binding if set
below the equilibrium price.
The price floor is binding if set above
the equilibrium price, leading to a
surplus.
Think of price floors as not being able to
go below the floor.
A Price Floor That Is Not Binding...

Price of
Ice-Cream
Cone
Supply

Equilibrium
price

$3

Price
2
floor

Demand

0 100 Quantity of
Equilibrium Ice-Cream
quantity Cones
 A Price Floor That Is Binding...

Price of
Ice-Cream
Cone
Supply
Surplus

$4 Price floor

$3

Equilibrium
price

Demand

0 80 120 Quantity of
Quantity Quantity Ice-Cream
demanded supplied Cones
 Effects of a Price Floor

A binding price floor causes . . .

 a surplus because QS >QD.
 nonprice rationing is an alternative
mechanism for rationing the good,
using discrimination criteria.
Examples: The minimum wage, Agricultural price
supports
State Minimum Wages
 The Minimum Wage

A Free Labor Market

Wage
Labor
supply

Equilibrium
wage

Labor
demand
0 Equilibrium Quantity of
employment Labor
 The Minimum Wage
A Labor Market with a
Wage
Minimum Wage
Labor
Labor surplus supply
(unemployment)
Minimum
wage

Labor
demand
0 Quantity Quantity Quantity of
demanded supplied Labor
Thank You