CHAPTER 3 Appendix

The Mathematics of D/S Model

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 Chapter 3 - Appendix

3A.1 The Language of Graphs : Review

3A.2 The Mathematics of D/S Model

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 The Language of Graphs
A review

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 HOW TO READ AND UNDERSTAND GRAPHS

GRAPHING TWO VARIABLES The basic purpose of a graph is to

y  f x 
illustrate a relationship between two variables.

Name of the function

• Output Value
• Member of the Range
• Dependent Variable
• Input Value
• Member of the Domain
These are all equivalent names for the y. • Independent Variable
These are all equivalent names for the x.

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 Relationships

• A positive or direct relationship is said to exist when variables

move in the same direction.
• A negative or inverse relationship is said to exist when variables
move in the opposite direction.
• Variables are independent (unrelated) if one variable remains
constant when the other changes.

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 The x and y intercepts of a line

Intercepts y

y-intercept
(0,b)
x
x-intercept
(a,0) • Where the graph crosses the x-axis is the
x-intercept. It coordinates (a,0).

• Where the graph crosses the y-axis is the

y-intercept. It coordinates (0,b).

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 USING GRAPHS : Slope
SLOPE Y Y2  Y1

X X 2  X1
A Curve with (a) Positive Slope and (b) Negative Slope

A positive slope A negative slope

indicates that increases indicates the
in X are associated with opposite—when
increases in Y and that X increases,
decreases in X are Y decreases and
associated with when
decreases in Y. X decreases, Y in
creases.

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 USING GRAPHS
– Graphing Two Variables
► Relationshipbetween Hours
Worked and Income

There is a positive relationship between

work hours and income, so the income
curve is positively sloped.
The slope of the curve is ?
Each additional hour of work increases
income by ?
 Using Mathematics : Equations
Example 1 : Relationship between Two Variables
Income $ Consumption $
0 50
100 100
200 150
300 200

Graphical Relationship between Two Variables ( plot data in a graph ) ?

Looking at the data and the graph calculate slope ?
Identify constant ‘a’ or intercept ‘b’ and write equation of line as ‘y = a + bx’ ?
The Mathematics of D/S Model

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 Mathematics of D/S Model

The Appendix presents short-run analysis of Supply and Demand using Algebraic
Equations.

Viewing the demand and supply functions in terms of an equation is a helpful tool
in understanding the mechanics of demand supply model.

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 Mathematics of D/S Model
Demand Functions: Qd = f (P)
The relation between price and quantity demanded per period of time, when all
other factors that affect consumer demand are held constant, is called a
demand function or simply Demand.
Demand gives, for various prices of a good,
the corresponding quantities that consumers are willing and able to purchase at
each of those prices, all other things held constant. The “other things” that are
held constant for a specific demand function are the five variables other than price
that can affect demand.
A demand function can be expressed as an equation;
Qd as a function of P, a Schedule, a table, or a graph.
We begin with a demand equation.

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 Mathematics of D/S Model
Assuming a straight-line demand curve, it can be also be described by the
following equation:
P = a – b Qd

o a and b are positive numbers

o a is the intercept on y-axis (where Qd = 0 and P = a).
o If Qd > 0, P < a.
o b is the slope of the demand curve. It has negative sign to reflect the inverse
relationship between price and quantity demanded.

We can use these equations to find the

equilibrium price (P*) and equilibrium quantity (Q*) where Qd = Qs.

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 Demand Function and Supply Function :

Demand function can be expressed as Dependent Variable and Independent Variable

Qd = f [ P ]
where P is price + non-price determinants of D
Supply function expressed as Dependent Variable and Independent Variable
Qs = f [ P ]
where P is price + non-price determinants of S
 Demand Function and Demand Curve:
Demand function can be expressed as Dependent Variable and Independent Variable Qd = f [ P ]

Assume :
Qd = f [ P - ; { Ps, Pc-, I +, -, Ex +, -, T +, -, Nb+,- ….} ]

Example : Qd = -100P + 1.5 Pb - 5 Ps + 20 A + 1.5 I + 1 T

When Ps: 2.5, Pc: 1, I: 4, T: 2, Estimate the Demand, i.e, ‘Demand Equation’ ?
 Demand Function : Qd = f [ P ; { Ps, Pc, I, Ex, T, Nb ….} ]
Example 1: Demand of Pizza is given in following equation ( Page 67 – 68 )

Qd = -100P + 1.5 Pbg – 5 Psd + 20 A + 15 Pop

Assume values of Pbg = $100, Psd = $75, A = $20, Pop = 35,

Find the Demand Curve Equation ?

How can we express the above equation expressed in terms of Qd ?

 Demand Function : Qd = f [ P ; { Ps, Pc, I, Ex, T, Nb ….} ]

Example 2 : Demand of Pizza is given in following equation ( Page 68 )

P = 7 – 0.01 Qd

Find the Demand Curve Equation when price of Burger increases to $120?

Practice / Assignment :
Plot Graph of Demand Curve in a Diagram, using given equation Qd = 700 – 100P, as per Appendix 3A.2.
Graphically, you will observe that in Fig 3A.2, with increase in price of substitute, the ‘ Y intercept ‘ increas
es from 7 to _?_ and the demand curve would show a __?__ - ward shift.
 Supply Function : Qs = f [P; {Ps, P, Pi, Ex, T, Ns ….}]

Example 3 : Recall Demand of Pizza to be Qd = 700 – 100P or P = 7 – 0.01 Qd ( Page 69 )

Now assuming Qs = -100 + 100P
Find Equilibrium Quantity Q* and Equilibrium P* ?
 The Market Equilibrium : Practice Example

Chapter Appendix Example / Assignment :

Suppose the demand equation is P = 7 – 0.01 Qd,
and the supply equation is P = 1 + 0.01 Qs

(a) Find Equilibrium Q* and P*.

(b) Find Q if P = 5. How do you interpret your answer?

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 Chapter 3 - Appendix

Book :

• Managerial Economics Economic Tools for Today’s Decision Makers

Paul G. Keat, Philip K. Y. Young, Stephen E. Erfle - 7th Edition

Reading and Practice Assignment : Page 67 - 69