Professional Documents
Culture Documents
The Demand and Supply Mechanism
The Demand and Supply Mechanism
Business Strategy
Chapter 2
Market Forces: Demand and Supply
Samsung and Hynix Semiconductor to
cut chip production
• Sam Robbins, owner and CEO of PC solutions, arrived at the office
and glanced at the front page of The Wall Street Journal waiting on his
desk. One of the articles contained statements from executives of two
South Korea’s largest semiconductor manufacturers-Samsung
Electronic Company and Hynix Semiconductor-indicating that they
would suspend all their memory chip production for one week. The
article went on to say that another large semiconductor manufacturer
was like to follow suit. Collectively, these three chip manufacturers
produce about 30% of the world’s basic semiconductor chips.
• PC solution is a small but growing company that assembles PCs and
sell them in the highly competitive market for “clones”. PC Solution
experienced 100% growth last year and is in the process of
interviewing recent graduates in an attempt to double its work force.
• After reading the article, Sam picked up the phone and called a few of
his business contacts to verify for himself the information contained in
the journal. Satisfied that the information was correct, he called the
director personnel, Jane Remark.
• What do you think they discussed?
2-3
D
Quantity
2-4
Determinants of Demand
• Income
Normal good
Inferior good
• Prices of Related Goods
Prices of substitutes
Prices of complements
• Advertising and
consumer tastes
• Population
• Consumer expectations
2-5
Qxd = quantity demand of good X.
Px = price 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.
2-6
A
10
B
6
D0
4 7 Quantity
2-8
Change in Demand
Price D0 to D1: Increase in Demand
6
D1
D0
7 13 Quantity
2-9
Consumer Surplus:
2
D
1 2 3 4 5 Quantity
2-13
Price
S0
Quantity
2-14
Supply Shifters
• Input prices
• Technology or
government regulations
• Number of firms
Entry
Exit
• Substitutes in production
• Taxes
Excise tax
Ad valorem tax
• Producer expectations
2-15
QxS = quantity supplied of good X.
Px = price of good X.
PR = price of a production substitute.
W = price of inputs (e.g., wages).
H = other variable affecting supply.
2-16
S0
B
20
A
10
5 10 Quantity
2-18
Change in Supply
S0 to S1: Increase in supply
Price
S0
S1
5 7 Quantity
2-19
Producer Surplus
• The amount producers receive in excess of the amount
necessary to induce them to produce the good.
Price
S0
P*
Q* Quantity
2-20
Market Equilibrium
• The Price (P) that Balances
supply and demand
QxS = Qxd
No shortage or surplus
• Steady-state
2-21
7
6
5
Shortage D
12 - 6 = 6
6 12 Quantity
2-22
If price is too high…
Surplus
Price 14 - 6 = 8
S
9
8
7
6 8 14 Quantity
2-23
Price Restrictions
• Price Ceilings
The maximum legal price that can be charged.
Examples:
• Gasoline prices in the 1970s.
• Housing in New York City.
• Proposed restrictions on ATM fees.
• Price Floors
The minimum legal price that can be charged.
Examples:
• Minimum wage.
• Agricultural price supports.
2-24
PF
P*
P Ceiling
Shortage D
Qs Qd Quantity
Q*
2-25
P*
Qd Q* QS Quantity
2-28
P0
P*
Q* Quantity of PC’s
Q0
2-33
P1
P0
D*
Q0 Q1 Quantity of
Software
2-36
Conclusion
• Use supply and demand analysis to
clarify the “big picture” (the general impact of a current
event on equilibrium prices and quantities).
organize an action plan (needed changes in production,
inventories, raw materials, human resources, marketing
plans, etc.).
Answering the Headline…
• Now that we have developed a formal apparatus for
understanding how markets work, we will return to the
story that opened this chapter.
• Sam recognized that a cut in chip production will
ultimately lead to the higher chip prices. Since chip are a
key input in the production of PCs, an increase in the
prices of chips would in turn lead to a decrease in the
market supply of PCs, that ultimately leads to the price
rise.
• In light of this anticipated decline in PC sales, Sam and
Jane discussed the wisdom of going a head with their plan
to double PC solutions, workforce at this time.