Gage University College

MBA Program

Course title: Managerial Economics

Course code: MBA 751
Credit hours: 2

Tadesse Zenebe
November, 2022
Addis Abeba, Ethiopia
Chapter 2: Demand and Supply
1. Demand and its Determinants
2. Supply and its Determinants
3. Market Equilibrium
4. Elasticity of Demand
Demand and its Determinants
Demand:
• The different quantities of a product that buyers are willing and able to buy
at various prices in a given period of time other things remain unchanged.
• From the definition;
• The consumer is willing to buy the product.
• The consumer should have the ability to buy the product.
• Demand is time specific.

Quantity demand:
• Specific quantity of a product that a household would buy at a particular
price in a given time period.
Demand and its Determinants
.
The Law of Demand(DD):
• The law of DD states that there
is a negative/inverse, r/ship
between price & the quantity of
a good demanded.

• That is, DD curves slope

downward.
Demand and its Determinants
Individual & Market
DD:
• DD for a good/service can be defined
for an individual HH, or for a group
of HHs that make up a market.
• Market DD is the sum of all the
quantities of a good or service
demanded per period by all the HHs
buying in the market for that good or
service.
• Assuming there are only two HHs in
the market, market DD is derived as
follows:
Demand and its Determinants
Factors that will cause a shift in demand (decrease or increase)
•Price of the product (own-price determinant of demand)
•Taste and preferences
•Income of the consumer (normal goods versus inferior goods)
•Price of other goods ( substitute or complementary)
•Outlook (consumer expectation of future income and prices)
•Number of potential customers
Supply and its Determinants
Supply:
• The various quantities of a product that sellers are willing & able to provide
at various prices in a given period of time other things remain unchanged.
• From the definition;
• The seller is willing to sell the product
• The seller should have the ability to provide the product
• Supply is time specific
Quantity Supply:
• The number of units of a product that a firm would be willing and able to
offer for sale at a particular price during a given time period.
Supply and its Determinants
. Supply curve
The Law of SS:
• The law of SS states that
there is a positive relationship
between price & quantity of a
good supplied. P𝑸𝒔
• This means that SS curves P𝑸𝒔
typically have a positive
slope.
Supply and its Determinants
.
Individual & Market SS:
• The SS of a good/service can be defined
for an individual firm, or for a group of
firms that make up a market /industry.
• Market SS is the sum of all the quantities
of a good/service supplied per period by
all the firms selling in the market for that
good or service.
• As with market DD, market SS is the
horizontal summation of individual
firms’ supply curves.
Supply and its Determinants
Factors that will cause a shift in supply (decrease or increase)
• Price of Inputs ( Change in price of inputs required to produce the good.)
• Technology (Improvements in machines & production processes of a good)
• Price of related goods
• Government Actions (Subsidies, Taxes and Regulations)
• Expectations (outlook of future prices and profits)
• Size of Industry (Number of firms in the industry)
Market Equilibrium
♯ Equilibrium is a condition that exists when 𝑄𝑠 = 𝑄𝑑 .
♯ At equilibrium, there is no tendency for the market
price to change.
♯ Only in equilibrium is 𝑄𝑑 = 𝑄𝑠 .
♯ At any P other than P*, the wishes of buyers &
sellers do not coincide.
♯ Excess DD or shortage exists when 𝑄𝑑 > 𝑄𝑠 .
♯ When 𝑄𝑑 > 𝑄𝑠 , P until equilibrium is restored.
♯ Excess SS, or surplus exists when 𝑄𝑠 > 𝑄𝑑 .
♯ When 𝑄𝑠 > 𝑄𝑑 , P until equilibrium is restored.
Example
Assume the following DD and SS conditions in metropolitan area for
recyclable aluminum:
𝑸𝑫 = 𝟑, 𝟏𝟕𝟓 − 𝟏𝟎𝟎𝑷 −−−−−− −𝑫𝑫
𝑸𝑺 = 𝟐𝟓 + 𝟕𝟓𝑷 −−−−−−−−− −𝑺𝑺
Where 𝑄 is quantity measured in pounds of aluminum and P is price in cents.
1. Determine the equilibrium price and quantity.
2. Interpret your result.
3. Evaluate the equilibrium condition at price (P = 15, or P = 20).
Justify that P = 20 lead to surplus and P = 15 lead to shortage.
Effect of Change in DD & SS on Equilibrium P & Q

Increase in DD leads to higher Increase in SS leads to lower

equilibrium P & higher equilibrium Q. equilibrium P & higher equilibrium Q.
Effect of Change in DD & SS on Equilibrium P & Q

Activity

1. Evaluate the effect of decrease in DD and decrease in Supply on equilibrium

price and equilibrium quantity
Effect of Change in DD & SS on Equilibrium P & Q

Decrease in DD leads to lower price Decrease in SS leads to higher P and

and lower quantity exchanged. lower quantity exchanged.
Effect of Change in DD & SS on Equilibrium P & Q

Decrease in DD and Increase in SS Decrease in DD and Increase in SS

Effect of Change in DD & SS on Equilibrium P & Q

Activity
1. Evaluate the effect of increase in both DD and SS on equilibrium
price and equilibrium quantity assuming;
A. Change in supply is greater than change in demand.
B. Change in demand is greater than change in supply.
Effect of Change in DD & SS on Equilibrium P & Q

Increase in DD and SS Increase in DD and SS

Elasticity of Demand

Think about it ……………

The law of demand says …… “Consumers will buy more when
prices go down and less when prices go up”
But how much more or how much less?
Does it matter?
To whom?
Elasticity of Demand

Major elasticity Measures includes:

1. The price elasticity of Demand
2. The income Elasticity of Demand
3. The Cross price elasticity of Demand
4. Advertising elasticity
The price elasticity of Demand is the Measures of Responsiveness
of demand to Price Changes.
Elasticity of Demand

Point elasticity of DD: Arc elasticity of DD:

∆𝑸 𝑷𝟎 ∆𝑸 𝑷𝟎 + 𝑷𝟏
𝑬𝒅 = ∗ 𝑬𝒅 =
∆𝑷
∗
𝑸𝟎 + 𝑸𝟏
∆𝑷 𝑸𝟎
Elasticity of Demand

Elasticity description and effect of elasticity on Revenue

Elasticity of Demand

Factors affecting elasticity of demand

Degree to which the good is a necessity.
Availability of substitutes.
Proportion of income a consumer spends on the good in question.
Time of adjustment is an important influence on elasticity.
Elasticity of Demand

Example
1. The price of men lotion was Birr 150, & Mr. X was willing to buy 10 men
lotions. Now, the price has gone up to Birr 165, & Mr. X is willing to buy 8
men lotions.
A. What is Mr. X's elasticity of demand for men lotion?
B. Is Mr. X's DD for men lotion elastic or inelastic?
2. Assume the following DD and SS conditions in metropolitan area for
recyclable aluminum:
𝑸𝑫 = 𝟑, 𝟏𝟕𝟓 − 𝟏𝟎𝟎𝑷 −−−−−− −𝑫𝑫
𝑸𝑺 = 𝟐𝟓 + 𝟕𝟓𝑷 −−−−−−−−− −𝑺𝑺
A) Determine the price elasticity of demand at equilibrium of the market.
“the end”