MANAGERIAL ECONOMICS

CHAPTER 2: Supply and Demand: You Have Want Consumers Want

DEMAND
 simply means a consumer's desire to buy goods and services without any hesitation
and pay the price for it.
 the relationship between how much customers must pay for an item and how
much customers buy on it.
 More precisely, demand shows the relationship between a good’s price and the
quantity of the good customers purchase, holding everything else constant.

LAW OF DEMAND
 The law of demand states that as prices rise, customers buy less.
 There is an inverse relationship between price and quantity demanded.
 The quantity of a good demanded falls as the price rises, and vice versa.

DEMANDING LOWER PRICES

The relationship between how much customers must pay for an item and how much customers
buy is called demand. More precisely, demand shows the relationship between a good’s price
and the quantity of the good customers purchase, holding everything else constant.

Quantity Demanded and Demand

Quantity demanded
 the amount of a good or service people will buy at a particular price at a
particular time.
 is the amount of the good customers purchase at a given price.
 it is a specific number.
 it appears like a dot only and represents only one particular quantity. 
 
Demand
 the quantity of a good or service that consumers are willing and able to buy at
given prices during a period.
 an equation or line on a graph that indicates how price and quantity demanded
are related.
 refers to the entire curve.
 it shows how much is purchased at every possible price.
 It appears like a line on which multiple quantities for different prices exist. 

Graphing Demand
 The graph of the demand curve enables you to focus on the relationship between
price and quantity demanded.
 The graph shows you that when prices are very high, customers want to buy fewer
treats.

Changing price
 Price changes cause movements along the demand curve, or a change in quantity
demanded.
 An inverse relationship exists between price and quantity demanded — price and quantity
demanded move in opposite direction.
*An inverse relationship means that higher prices result in lower quantity demand and lower prices
result in higher quantity demand.

Shifting the demand curve

 When one of the things being held constant — income, tastes, and the prices of other
goods — changes, the entire demand curve shifts.
 Any rightward shift in the demand curve is an increase in demand, and any leftward shift
in the curve is a decrease in demand.

The factors that shift the entire demand curve are:

 1. Consumer tastes or preferences: A direct relationship exists between desirability
(consumer tastes) and demand. Thus, an increase in desirability increases demand.
2. Income: Income’s impact on demand is a little more complicated.
Economists note two types of goods
(a). Normal goods - a direct relationship exists between income and demand — an
increase in income increases demand. This is the expected, or normal, relationship.
(b). Inferior goods - an increase in income decreases demand; therefore, an inverse
relationship exists between income and demand for an inferior good.
3. Prices of other goods: Changes in the prices of other goods are also a little complicated. If
the goods are consumer substitutes for one another, they are used interchangeably. A direct
relationship exists between one good’s price and the demand for the second, substitute,
good.
Consumer complements are a second type of goods. An inverse relationship
exists between one good’s price and the demand for its consumer complement.

SUPPLYING HIGHER PRICES

SUPPLY
BY HOLDING EVERYTHING ELSE CONSTANT (CERRIBUS PARIBUS,SUPPLY ENABLES
YOU TO FOCUS ON THE RELATIONSHIP BETWEEN PRICE AND THE QUALITY
SUPPLIED .
 describes the relationship between the good’s price and how much business are willing to
provide
 a schedule that shows the relationship between the good’s price and quantity supplied

 Higher prices give suppliers an incentive to supply more of the product or

commodity, assuming their costs aren't increasing as much.

UNDERSTANDING QUANTITY SUPPLIED AND SUPPLY

SUPPLY
  is the willingness of sellers to offer a given quantity of a good or service for a
given price.
 all possible prices and the amount of quantity or the quantity supplied
 Economists use the term supply to refer to the entire curve.

QUANTITY SUPPLIED
 number of goods or services that suppliers will produce and sell at a given
market price.
 amount of goods business provide at a specific price
 actual number

LAW OF SUPPLY
 states that a higher price leads to a higher quantity supplied and that a lower price leads to
a lower quantity supplied
 The quantity of a good supplied (i.e., the amount owners or producers offer for
sale) rises as the market price rises, and falls as the price falls.
 states that all other factors being equal, as the price of a good or service
increases, the quantity of goods or services that suppliers offer will increase, and
vice versa.

TOOLS THAT CAN BE USED IN DETERMINING THE RELATIONSHIP BETWEEN

QUANTITY SUPPLIED AND PRICE
SUPPLY SCHEDULE
 a table that shows the quantity supplied at each price

SUPPLY FUNCTION
 a mathematical formula that depicts the relationship between quantity supplied and price

WHERE:
Qs= quantity supplied
c= autonomous level of supply
d= the price coefficient of supply
P=price

SUPPLY CURVE
 graph shows the relationship between prices and quantity supplied.
 is an equation or line on a graph showing the different quantities provided at very
possible price.

GRAPHING SUPPLY
 a graphic representation that shows the relationship between price and quantity
supplied.

Where:
        Product Price - measured on the vertical axis.
        Quantity of Product - measured on the horizontal axis.

Changing price
 As price goes down, the quantity supplied decreases; as the price goes up, quantity
supplied increases.
 Price changes cause changes in quantity supplied represented by movements
along the supply curve.
 This movement indicates that a direct relationship exists between price and
quantity supplied.
 Price and quantity supplied move in the same direction.
 Shifting the supply curve
When economists focus on the relationship between price and quantity supplied, a lot
of other things are held constant, such as production costs, technology, and the prices
of goods producers consider related. When any one of these things changes, the entire
supply curve shifts.

 Rightward shift in the supply curve always indicates an increase in supply.

 Leftward shift in the supply curve indicates a decrease in supply.

Ceteris Paribus- used in economics to rule out the possibility of ‘other’ factors changing so
the specific causal relation of two variables is focused.

FACTORS THAT SHIFT THE SUPPLY CURVE:

1. Production Costs
  Input prices and resulting production costs are inversely related to
supply.
 Inverse Relationship – also known as negative correlation, means
that when one variable increases, the other variable decreases,
and vice versa
2. Technology
 Technological improvements in production shift the supply curve.
Specifically, improvements in technology increase supply — a
rightward shift in the supply curve.
      3. Prices of Other Goods
 2 Types of Other Goods
 Joint Products – products that are produced together. There
is a direct relationship between a good’s price and the
supply of its joint product.
 Producer Substitutes – is a substitute goods that can be
created using the same resources.
LAW OF DEMAND AND SUPPLY

(https://sites.google.com/site/phsacebusiness/
economics/unit-2---microeconomics-concepts/
1--law-of-demand)
- As the PRICE
increases,
DEMAND
decreases.
- As the PRICE
decreases,
DEMAND
increases.
(https://forestrypedia.com/law-of-supply/)

- As the PRICE increases, SUPPLY increases.

- As the PRICE decreases, SUPPLY decreases.

DETERMINING EQUILIBRIUM: MINDING YOUR P’S AND Q’S

EQUILIBRIUM PRICE
 Also known as compromise price.
 The price that makes quantity demanded equal to quantity supplied.
 It occurs where the demanded and supply curves intersects.
 In general, a surplus of goods or services leads to lower prices, which increases demand,
whereas a shortage or undersupply raises prices, which decreases demand.
Because the graphs for demand and supply curves both have price and quantity on
different axis, the demand curve and supply curve for a particular good can appear on
the same graph.

KINDS OF EQUILIBRIUM
 Economic Equilibrium - refers broadly to any state in the economy where forces are
balanced.
 Competitive Equilibrium - where the process by which equilibrium prices are reached is
through a process of competition.
 General Equilibrium - considers the aggregation of forces occurring at the macro-
economic level, and not the micro forces of individual markets. General equilibrium does
not just refer to a single market, this refers to the economy as a whole.
 Underemployment Equilibrium - or below full employment equilibrium, a condition
where employment in an economy persists below full employment and the economy has
 entered an equilibrium state that sustains a rate of unemployment above what is
considered desirable.
 Lindahl Equilibrium - in theory, the optimal amount of public goods is produced and the
cost of public goods is fairly shared among everyone
 Intertemporal Equilibrium - economic concept that holds that the equilibrium of the
economy cannot be adequately analyzed from a single point in time but instead should be
analyzed over the long term
 Nash Equilibrium - a state of play whereby the optimal strategy involves considering the
optimal strategy of the other player or opponent. This assumes that an individual will not
earn additional benefits from changing its strategies assuming other individuals are also
consistent with their strategies.

DISEQUILIBRIUM
 When markets are not in a state of equilibrium, they are said to be in disequilibrium.

DETERMINING THE PRICE MATHEMATICALLY

In order to determine equilibrium mathematically, remember that quantity demanded must
equal quantity supplied.

To determine the equilibrium price, do the following.

1. Set quantity demanded equal to quantity supplied:
QD = 300–50P = –100+150P = QS

2. Add 50P to both sides of the equation.

You get
300–50P+50P = –100+150P+50P
300 = –100+200P

3. Add 100 to both sides of the equation.

You get
300+100 = –100+200P+100
400 = 200P

4. Divide both sides of the equation by 200.

400/200 = 200P/200
2 = P or
P=2
Equilibrium Price = $2.00 per box

Producing not Enough: The Cupboard is Bare

SURPLUS
 Simply means excess supply.

SHORTAGE
 This exists when the quantity supplied of a good is less than the quantity demanded.
 There is excess demand.

CHANGING EQUILIBRIUM: SHIFT HAPPENS

Equilibrium itself can change. Because equilibrium corresponds to the point where the demand
and supply curves intersect, anything that shifts the demand or supply curves establishes a new
equilibrium.

Changes in Equilibrium- means changes in the determinants of supply and/or demand

result in a new equilibrium price and quantity. When there is a change in supply or
demand, the old price will no longer be an equilibrium. Instead, there will be a shortage
or surplus, and price will subsequently adjust until there is a new equilibrium.
There are instances where both demand and supply shift at the same time, and this
makes determining the changes in equilibrium price and quantity more difficult.
When both demand and supply shift simultaneously, the change in only one equilibrium
characteristics – price or quantity – can be definitely determined.

Take Note!!!
No matter what happens to supply and demand, the market always adjusts to its
equilibrium point.