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    Managerial Economics - Market

    Copyright:

    © All Rights Reserved
    Download as PDF or read online from Scribd
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    Download as pdf
    6 views12 pages

    Managerial Economics - Market

    Uploaded by

    itssmariaaaa
    Managerial Economics - Market

    Copyright:

    © All Rights Reserved
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    CHAPTER 2: Market Learning Objectives: This chapter discusses the demand and supply concepts in the market. At the end of this chapter, the readers will be able to understand the law of demand and supply, distinguish the difference between change in quantity demanded from change in demand and the change quantity supplied from change in supply, identify the determinants of demand and supply, identify the equilibrium price and equilibrium quantity and analyze the effects of the changes of demand and supply to equilibrium price and equilibrium quantity. here are two actors involved in the market. re the (1) also known as the and the (2) sallstgaigo known as the suppliers. Hence, this topic will be divided into parts, demand side and supply side, before discussing the market equilibrium. Elasticity will be explained on the last part of this chapter. 244 Demand Demand shows various amount of goods that consumers are willing and able to buy at a specific period of time (day, week, month or year). This can be represented as demand schedule or demand table, demand curve and demand function, 2.4.4 Demand Schedule : we Lotio Price Quantity The table shows that Demanded This is called the law of a 100 demand, 5 90 10 80 Take note that demand is different from quantity 15 70, demanded. Demand refers to the whole schedule while 20 60, quantity demanded refers to the specific amount of good 25 50 ata given price (ie at price 10 quantity demanded is 80). Based on the above demand schedule, quantity demanded will be changed when price changed, leaving demand unchanged. Demand can change based on the change of its determinants known as determinants of demand. A change in demand can be easily shown using the demand curve There are three explanations of the inverse relationship of price and quantity demanded: 1. The law of demand is consistent with Common Sense. People ordinarily do buy more of a product at a low price than at a high price. Price is an obstacle that deters consumers from buying the lower the price at businesses have “sales” is evidence of their belief in the law of demand. 2. In any specific time period, each buyer of a product will derive less satisfaction (or benefit, or utility) from each successive unit of the product consumed. The second Big Mac will yield less satisfaction to the consumer than the first, and the third still less than the second. That is, consumption is subject to Di ing Marginal Utility. And because successive units of a particular product yield less and less marginal utility, consumers will buy additional units only if the price of those units is progressively reduced. 3. We can also explain the law of demand in terms of income and substitution effects. The income effect indicates that a lower price increases the purchasing power of a buyer's money income, enabling the buyer to purchase more of the product than before. A higher price has the opposite effect. The substitution effect suggests that at a lower price, buyers have the incentive to substitute what is now a less expensive product for similar products that are now relatively more expensive, The product whose price has fallen is now ‘a better deal” relative to the other products. For example, a decline in the price of chicken will increase the purchasing power of consumer incomes, enabling people to buy more chicken (the income effect). At a lower price, chicken is relatively more attractive, and consumers tend to substitute it for pork, lamb, beef, and fish (the substitution effect). The income and substitution effects combine to make consumers able and willing to buy more of a product at a low price than at a high price. 2.4.2, Demand Curve ‘Transforming the above demand schedule to demand curve: P Increase in demand will shift the 5 demand curve to the right (00 to D1). 0 . Decrease in demand will shift the 45 * demand curve to the left (00 to D2). 50 60 70 680) «69 ©6100 DO Because of the inverse relationship of price and quantity demanded, demand curve is a downward sloping curve, Consider the following determinants of demand: 1. Tastes or preferences. If consumers have favorable response regarding the good, demand will increase making demand curve shifts to the right. On the other hand, unfavorable response of consumers on the good will decrease demand and will shift demand curve to the left 2. Number of Buyers. An increase in the number of buyers will increase in demand and make the demand curve shift to the right. Otherwise to the left 3. Income, There are two kinds of goods under income, normal good or superior good and inferior good. As income increase demand for normal good also increase. This means a positive relationship between income and normal goods. On the other hand, as income increase demand for inferior good will decrease. Thus, there is a negative or inverse relationship of income and inferior good. 4. Price of Related Goods. Substitute goods and complementary goods are considered as related goods. When there is an increase of price of a particular good and the demand of its related good increased, the goods are considered as substitute goods. ‘On the other hand, when there is an increase of price of a particular good and the demand of its related good decreased, these goods are complementary goods. 5. Expectation. Consumer's expectations on the change of price because of weather, tradition and culture. In example, if there will be a super typhoon tomorrow today's demand will increase because consumers are expecting higher price of goods after typhoon and decrease of supply of goods. These determinants are also known as non-price determinants. The effect of the change of these determinants causes the movement of one curve to another demand curve which is called change in demand. ‘Any movement from one point to another point along the same demand curve due to the change in price of the commodity itself, holding other determinants constant, is called change in quantity demanded. 2.4.3 Demand Function Another representation of demand is a function. Considering the given demand schedule, we can derive its demand function’ -bP Q= where Q.= Quantity Demanded, a = intercept (at price 0), b = slope (“2*), and P = price. The negative slope represents the negative relationship of price and quantity demanded. Intercept is the maximum amount of goods that the consumers are willing and able to buy at price 0. Thus, Qd = 100-2P To check: substitute the P with the given prices from the table. Qa = 100 - 2(0) = 100-0 = 100 Qa = 100 - 2(5) = 100- 10 = 90 Qd = 100-2(10) 80 Qd = 100 - 2(15) = 100 - 30 = 70 Qd = 100- 2(20) = 100-40 Qa = 100 2(25) = 100-50 60 50 This function is applicable to linear equation where the slope is constant or equal. In this function, the slope is -2 2.2 Supply ‘Supply shows various amount of goods that suppliers are willing and able to sell or make available in the market at a specific period of time (day, week, month or year). This can be represented as supply schedule or supply table, supply curve and supply function. 2.24 Supply Schedule Price | Quantity The table shows that as the price increases, the quantity Supplied supplied also increases. This is called the law of supply. 0 60 Take note that supply is different from quantity supplied. Supply 5 70 refers to the whole schedule while quantity supplied refers to 2 eo the specific amount of good at a given price (ie., at price 10 20 700 quantity supplied is 80) 25 110 Based on the supply schedule, quantity supplied can be changed when price changed leaving supply unchanged, Supply can change based on the change of its determinants known as determinants of supply. A change in supply can be easily shown using the supply curve 2.2.2 Supply Curve The positive or direct relationship of price and quantity supplied shows an upward sloping curve of supply curve. P S So ST 25} 20+ 15+ 10 5 Lf Qs 50-60 70 80 90 100 110 Increase in supply will shift the supply curve to the right (So to S;). Decrease in supply will shift the supply curve to the left (So to Sz). If quantity supplied can be changed through the change in price, supply can be changed through the change of its determinants. There are six (6) determinants of supply: 1. Resource Price. This refers to the prices of resources used in the production like wages for labor and rent for capital. When there is an increase in the resource price, cost of production will increase that could lead to a decrease in supply, On the other hand, lower resource price leads to lower cost of production that will increase supply. 8 Technology. Upgrading the firm's production by using advance technology from manual production can decrease the cost of production. Instead of paying laborers with wages, the firms can make efficient production by using machineries. This leads to an increase in supply, Number of Sellers. An increase in the number of suppliers will also increase supply Taxes and Subsidies. Taxes are part of the cost of production while subsidies are help of the government to the firms. Taxes are mandatory payment of the firms. All firms should pay taxes but only firms can avail for subsidies. Subsidies are given for those who have an important role in the society and the government cannot give up its functions (i,eg production of the farmers). When the goverment imposed higher tax to the firms, cost of production will increase then supply will decrease. When subsidies like fertilizer and free irrigation were given to the farmers, cost of production decreased that could lead to an increase in supply. Price of other goods. These goods are not necessarily be related goods or complementary goods, but these two goods were production using same equipment and materials. Wherein it is easy to shift production from one good to another when the price of one good changed. Example: Suppose there are two balls, ball for basketball and a ball for volleyball. Then let us say, a firm is producing basketball, but the price of volleyball increased. A firm will choose to produce volleyball because of higher price therefore the supply of basketball will decrease. It is easy to shift a production because the two balls have almost the same materials and using the same equipment in production. Expectation. The suppliers are expecting for a change in price in the future. When the firms expected that the price of their goods will increase in the future, the present supply of their goods will decrease. These determinants are also known as non-price determinants. The movement of one curve to another demand curve caused by the change in non-price determinants is called change in supply. On the other hand, any movement of one point to another point along the same supply curve due to the change in the price of the good itself is called a change in quantity supplied. 2.2.3. Supply Function ‘Supply function is another representation of supply. Given the above supply schedule, we can derive its supply function: Qs=c+dP where Qs = Quantity Supplied, c = intercept (at price 0), d = slope ( “24, and P = price The positive slope (d) represents direct or positive relationship of price and quantity supplied, The intercept (c) is the maximum amount of goods that the suppliers are willing and able to make available in the market at price 0. Thus, Qs =60+2P 04 bee To check: substitute the P with the given prices from the table. This function is applicable to linear equation where the slope is constant or equal. In this, function, the slope is 2 Exercise 2 |. Underline the best answer, 1 2. 10, 1" 12, 13, 14, 15, A favorable change in consumer tastes for a product will (increase, decrease, unchanged) demand, the demand curve will shift to the (right, left, no shift). ‘An increase in the number of buyers in a market (increases, decreases, unchanged) demand, demand curve will shift to the (right, left, no shift), ‘As your income rises, your demand for inferior goods (increases, decreases, unchanged), demand curve for this good will shift to the (right, left, no shift). ‘As your income rises, your demand for superior goods (increases, decreases, unchanged), demand curve for this good will shift to the (right, left, no shift), ‘A newly expectation of higher prices may cause consumers to (increase, decrease, unchanged) its current demand, demand curve will shift to the (right, left, no shift). An increase in the price of a good will (increase, decrease, unchanged) the demand for its substitute good, demand curve for the substitute good will shift to the (right, left, no shift). An increase in the price of a good will (increase, decrease, unchanged) the demand for its complement, demand curve for its complement will shift to the (right, left, no shift). If there will be a super typhoon tomorrow, present demand will (increase, decrease, unchanged), demand curve will shift to the (right, left, no shift). When resource prices fall, firms will (increase, decrease, unchanged) their supply, supply curve will shift to the (right, left, no shift), Due to an increase in resource prices, firms will (increase, decrease, unchanged) their supply, supply curve will shift to the (right, left, no shift). Increase number of suppliers will (increase, decrease, unchanged) the supply, supply curve will shift to the (right, left, no shift). A decrease in the sales or property taxes will (increase, decrease, unchanged) supply, supply curve will shift to the (right, left, no shift). ‘An increase in sales or property taxes will (increase, decrease, unchanged) supply, supply curve will shift to the (right, left, no shift). Ifthe government subsidizes the production of a good, supply for this good will (increase, decrease, unchanged), supply curve will shift to the (right, left, no shift). Adopting advance technologies will (increase, decrease, unchanged) supply, supply curve will shift to the (right, left, no shift). 10 2.3 Market Eq m Since demand and supply are represented by three models, market equilibrium can also be determined using the three representations by combining the two. Equilibrium means balance or equal, therefore, market equilibrium exists when quantity demanded is equal to quantity supplied 2.3.1 Table or Schedule Using the demand schedule and supply schedule above, market equilibrium is at price 10 where Qd = Qs of 80. Price 10 is called the Equilibrium Price (Pe) while quantity 80 is called the Equilibrium Quantity (Qe). Quantity Quantity Price | Demanded | Supplied | ag | sy 0 100 60 a> 5 90 70 Shortage Qs=Qd cquioium => [CT oT) 15 70 9 0 60 100 _| Qd

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