W02 - Demand, Supply, and Market Equilibrium-FJO

Creating the great business leaders
Managerial Economics
By
Team Teaching FEB
Chapter 02 - Demand, Supply, and Market Equilibrium
Christopher Thomas, S. Charles Maurice
2020
Fakultas Ekonomi dan Bisnis
School of Economic and Business Learning Objectives
Telkom University
After reading this chapter, you will be able to:
2.1 Identify demand functions and distinguish between a change in demand and
a change in quantity demanded.
2.2 Identify supply functions and distinguish between a change in supply and a
change in quantity supplied.
2.3 Explain why market equilibrium occurs at the price for which quantity
demanded equals quantity supplied.
2.4 Measure gains from market exchange using consumer surplus, producer
surplus, and social surplus.
2.5 Predict the impact on equilibrium price and quantity of shifts in demand or
supply.
2.6 Examine the impact of government-imposed price ceilings and price floors.

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Demand
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■ Quantity demanded (Qd)

● Amount of a good or service consumers are willing & able to
purchase during a given period of time

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Definitions
■ Demand function
● Quantity demand as a function of the independent variables that
influence the quantity demanded
■ Direct demand
● The direct relationship between the quantity demanded and price
(other independent variables held constant)
■ Inverse demand
● The direct relationship between price and quantity demanded
■ Demand curve
● A graphical presentation of inverse demand
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General Demand Function
■ Six variables that influence Qd

● Price of good or service (P)
● Incomes of consumers (M)
● Prices of related goods & services (PR)
● Taste patterns of consumers (T)
• Expected future price of product (Pe)
• Number of consumers in market (N)
• General demand function
Qd = f(P, M, PR, T, Pe , N)
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Qd = a + bP + cM + dPR + eT + fPe + gN
■ b, c, d, e, f, & g are slope parameters
● Measure effect on Qd of changing one of the variables while holding
the others constant
■ Sign of parameter shows how variable is related to Qd
● Positive sign indicates direct relationship
● Negative sign indicates inverse relationship

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Variable Relation to Qd Sign of Slope Parameter
P Inverse b = Qd/P is negative

Direct for normal goods c = Qd/M is positive
M
Inverse for inferior goods c = Qd/M is negative
PR Direct for substitutes d = Qd/PR is positive
Inverse for complements d = Qd/PR is negative
T Direct e = Qd/T is positive
Pe Direct f = Qd/Pe is positive
N Direct g = Qd/N is positive

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Direct Demand Function
■ The direct demand function, or simply demand, shows how

quantity demanded, Qd , is related to product price, P, when all
other variables are held constant
● Qd = f(P)
■ Law of Demand
● Qd increases when P falls, all else constant
● Qd decreases when P rises, all else constant
● Qd/P must be negative

School of Economic and Business Direct Demand Function
Telkom University
Demand for Pork

Qd  f ( p, pb , pc, Y )
Qd  171  20 p  20 pb  3 pc  2 y
Qd / pb  20, q / pc  3, q / y  2
pb  4, pc  3, y  13
Qd  286  20 p

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Inverse Demand Function
■ Traditionally, price (P) is plotted on the vertical axis & quantity

demanded (Qd) is plotted on the horizontal axis
● The equation plotted is the inverse demand function, P = f(Qd)

School of Economic and Business Inverse Demand Function
Telkom University
■ How much consumers are willing to pay as a function of quantity
Q  286  20 p
p  14.30  0.05Q
p / Q  .05

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Graphing Demand Curves
■ A point on a direct demand curve shows either:

● Maximum amount of a good that will be purchased for a given
price
● Maximum price consumers will pay for a specific amount of the
good

School of Economic and Business Direct Demand Function
Telkom University
Q  D ( p, M , PR )
Qd  3,200  10 p  .05 M  24 PR
M  60,000, PR  200
Qd  1,400  10 P
Qd / M  .05
Inverse demand function
P  140 -1/ 10Qd
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Demand Schedule

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A Demand Curve (Figure 2.1)

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Graphing Demand Curves
■ Change in quantity demanded

● Occurs when only price changes
● Movement along demand curve
■ Change in demand
● Occurs when one of the other variables, or determinants of
demand, changes
● Demand curve shifts rightward or leftward

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Three Demand Shifts

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Shifts in Demand (Figure 2.2)

Supply
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■ Quantity supplied (Qs)

● Amount of a good or service offered for sale during a given
period of time

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Supply
■ Six variables that influence Qs
● Price of good or service (P)
● Input prices (PI )
● Prices of goods related in production (Pr)
● Technological advances (T)
● Expected future price of product (Pe)
● Number of firms producing product (F)
■ General supply function
● Qs = f(P, PI, Pr, T, Pe, F)

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General Supply Function
Qs = h + kP + lPI + mPr + nT + rPe + sF

■ k, l, m, n, r, & s are slope parameters
● Measure effect on Qs of changing one of the variables while holding
the others constant
■ Sign of parameter shows how variable is related to Qs
● Positive sign indicates direct relationship
● Negative sign indicates inverse relationship

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General Supply Function
Variable Relation to Qs Sign of Slope Parameter
P Direct k = Qs/P is positive
PI Inverse l = Qs/PI is negative
Inverse for substitutes m = Qs/Pr is negative

Pr Direct for complements m = Qs/Pr is positive
T Direct n = Qs/T is positive
Pe Inverse r = Qs/Pe is negative
F Direct s = Qs/F is positive

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Direct Supply Function
■ The direct supply function, or simply supply, shows how quantity

supplied, Qs , is related to product price, P, when all other variables
are held constant
● Qs = f(P)

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Supply of pork
Q  S ( p, ph )
Q  178  40 p  60 ph
ph  $1.50
Q  88  40 p

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Inverse Supply Function
■ Traditionally, price (P) is plotted on the vertical axis & quantity

supplied (Qs) is plotted on the horizontal axis
● The equation plotted is the inverse supply function, P = f(Qs)

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Inverse Supply Function
Qs  88  40 p
p  2.2  .025Qs

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Graphing Supply Curves
■ A point on a direct supply curve shows either:

● Maximum amount of a good that will be offered for sale at a given
price
● Minimum price necessary to induce producers to voluntarily offer
a particular quantity for sale

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Qs  S ( P, PI , F )
Qs  100  20 P  10 PI  20 F
PI  100, F  25
Qs  400  20 P
Inverse Supply
P  20  1 / 20Qs

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A Supply Curve (Figure 2.3)

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Graphing Supply Curves
■ Change in quantity supplied

● Occurs when price changes
● Movement along supply curve
■ Change in supply
● Occurs when one of the other variables, or determinants of
supply, changes
● Supply curve shifts rightward or leftward

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Three Supply Functions
Qs  100  20 P  10 PI  20 F
Qs / PI  10

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Shifts in Supply (Figure 2.4)

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Market Equilibrium
■ Equilibrium price & quantity are determined by the intersection of

demand & supply curves
● At the point of intersection, Qd = Qs
● Consumers can purchase all they want & producers can sell all
they want at the “market-clearing” or “equilibrium” price

School of Economic and Business Market Equilibrium
Telkom University
Qd  1,400  10 P
Qs  400  20 P
Qd  Qs
1,400  10 P  400  20 P
Pe  $60
Qe  800

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Market Equilibrium (Figure 2.5)

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Market Equilibrium
■ Excess demand (shortage)

● Exists when quantity demanded exceeds quantity supplied
■ Excess supply (surplus)
● Exists when quantity supplied exceeds quantity demanded

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Ceiling & Floor Prices
■ Ceiling price
● Maximum price government permits sellers to charge for a good
● When ceiling price is below equilibrium, a shortage occurs
■ Floor price
● Minimum price government permits sellers to charge for a good
● When floor price is above equilibrium, a surplus occurs

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Ceiling & Floor Prices (Figure 2.12)
Px Px
Sx Sx
Price (dollars)
3
2 2
1
Dx Dx
Qx Qx
22 50 62 32 50 84
Quantity Quantity
Panel A – Ceiling price Panel B – Floor price

School of Economic and Business Market Equilibrium
Telkom University
Qd  1,400  10 P
Qs  400  20 P
Qd  Qs
1,400  10 P  400  20 P
Pe  $60
Qe  800

School of Economic and Business $50 Price Ceiling
Telkom University
Qd  1,400  10 P
Qd  1,400  10(50)
Qd  900
Qs  400  20 P
Qs  400  20(50)
Qs  600
Excess demand  Qd  Qs  300
A price ceiling is only effective when it is set below the
equilibrium price

School of Economic and Business Marginal Valuation
Telkom University

Qd  1,400  10 P
Qs  600

600  1,400  10 P

P  80
Highest black market price

School of Economic and Business $80 Price Floor
Telkom University
Qd  1,400  10 P
Qd  1,400  10(80)
Qd  600
Qs  400  20 P
Qs  400  20(80)
Qs  1,200
Excess supply  Qs  Qd  600

School of Economic and Business 500 Unit Quota
Telkom University
Qd  1,400  10 P
Qe  800
Qs  500
Qd  Qs
500  1,400  10 P
PQuota  90
School of Economic and Business The amount exchanged
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■ Above equilibrium price the amount exchanged is determined by the

demand curve
■ Below equilibrium price the amount exchanged is determined by the
supply curve

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Value of Market Exchange
■ Typically, consumers value the goods they purchase by an amount

that exceeds the purchase price of the goods
■ Economic value
● Maximum amount any buyer in the market is willing to pay for
the unit, which is measured by the demand price for the unit of
the good

Measuring the Value of

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Market Exchange
■ Consumer surplus
● Difference between the economic value of a good (its demand price)
& the market price the consumer must pay
■ Producer surplus
● For each unit supplied, difference between market price & the
minimum price producers would accept to supply the unit (its supply
price)
■ Social surplus
● Sum of consumer & producer surplus
● Area below demand & above supply over the relevant range of
output

Measuring the Value of Market Exchange (Figure 2.6)

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Changes in Market Equilibrium
■ Qualitative forecast
● Predicts only the direction in which an economic variable will
move
■ Quantitative forecast
● Predicts both the direction and the magnitude of the change in
an economic variable

Demand Shifts (Supply Constant) (Figure 2.7)

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Supply Shifts (Demand Constant) (Figure 2.8)

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Simultaneous Shifts
■ When demand & supply shift simultaneously

● Can predict either the direction in which price changes or the
direction in which quantity changes, but not both
● The change in equilibrium price or quantity is said to be
indeterminate when the direction of change depends on the
relative magnitudes by which demand & supply shift

School of Economic and Business Simultaneous Shifts: (D, S)
Telkom University
S
S′
S′′
B
P′ A •
P •
P′′ • C
D′
Q
Q Q′ Q′′
Price may rise or fall; Quantity rises

School of Economic and Business Simultaneous Shifts: (D, S)
Telkom University
S
S′
S′
A
P •
B
P′ •
P′′ •C D
D′
Q
Q′ Q Q′′
Price falls; Quantity may rise or fall

School of Economic and Business Simultaneous Shifts: (D, S)
Telkom University
P
S′′
S′
S
P′′ • C
B
P′ •
A
P •
D′
Q
Q′′ Q Q′
Price rises; Quantity may rise or fall

School of Economic and Business Simultaneous Shifts: (D, S)
Telkom University
S′′
S′
S
P′′ •C A
P •
P′ • B
D
D′
Q
Q′′ Q′ Q
Price may rise or fall; Quantity falls

School Economics and Business
TERIMA KASIH….
57 Creating the great business leaders

W02 - Demand, Supply, and Market Equilibrium-FJO

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Creating the great business leaders

Creating the great business leaders

■ Quantity demanded (Qd)

Creating the great business leaders

■ Six variables that influence Qd

Creating the great business leaders

Variable Relation to Qd Sign of Slope Parameter

P Inverse b = Qd/P is negative

T Direct e = Qd/T is positive

Pe Direct f = Qd/Pe is positive

N Direct g = Qd/N is positive

■ The direct demand function, or simply demand, shows how

Creating the great business leaders

Demand for Pork

Creating the great business leaders

■ Traditionally, price (P) is plotted on the vertical axis & quantity

Creating the great business leaders

Creating the great business leaders

■ A point on a direct demand curve shows either:

Creating the great business leaders

Creating the great business leaders

Creating the great business leaders

■ Change in quantity demanded

Creating the great business leaders

Creating the great business leaders

Creating the great business leaders

Creating the great business leaders

■ Quantity supplied (Qs)

Creating the great business leaders

● Qs = f(P, PI, Pr, T, Pe, F)

Qs = h + kP + lPI + mPr + nT + rPe + sF

Creating the great business leaders

Variable Relation to Qs Sign of Slope Parameter

P Direct k = Qs/P is positive

PI Inverse l = Qs/PI is negative

Inverse for substitutes m = Qs/Pr is negative

T Direct n = Qs/T is positive

Pe Inverse r = Qs/Pe is negative

F Direct s = Qs/F is positive

■ The direct supply function, or simply supply, shows how quantity

Creating the great business leaders

Creating the great business leaders

■ Traditionally, price (P) is plotted on the vertical axis & quantity

Creating the great business leaders

Creating the great business leaders

■ A point on a direct supply curve shows either:

Creating the great business leaders

Creating the great business leaders

Creating the great business leaders

■ Change in quantity supplied

Creating the great business leaders

Creating the great business leaders

Creating the great business leaders

■ Equilibrium price & quantity are determined by the intersection of

Creating the great business leaders

Creating the great business leaders

Creating the great business leaders

■ Excess demand (shortage)

Creating the great business leaders

Creating the great business leaders

Panel A – Ceiling price Panel B – Floor price

Creating the great business leaders