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Managerial Economics & Business Strategy: Market Forces: Demand and Supply
Managerial Economics & Business Strategy: Market Forces: Demand and Supply
Business Strategy
Chapter 2
Market Forces: Demand and Supply
Determinants of Demand
Consumer Surplus V. Comparative Statics
Price
Quantity
Michael R. Baye, Managerial Economics and Business
Determinants of Demand
Income
Prices of substitutes
Prices of complements
Advertising
Population
Consumer expectations
A
10
B
6
D0
4 7 Quantity
6
D1
D0
7 13 Quantity
10 Consumer Surplus:
8 The value received but not
paid for
6
2
D
1 2 3 4 5 Quantity
10 Value
of 4 units
8
Consumer
Surplus 6
4 Total Cost of 4 units
2
D
1 2 3 4 5 Quantity
Michael R. Baye, Managerial Economics and Business
Market Supply Curve
The supply curve shows the amount of a good
that will be produced at alternative prices.
Law of Supply
The supply curve is upward sloping
Price
S0
Quantity
S0
B
20
A
10
5 10 Quantity
Michael R. Baye, Managerial Economics and Business
Change in Supply
S0 to S1: Increase in supply
Price
S0
S1
5 7 Quantity
Price
S0
P*
Producer
Surplus
Q* Quantity
Steady-state
7
6
Shortage D
12 - 6 = 6
6 12 Quantity
8
7
6 8 14 Quantity
PF
P*
Ceiling
Price
Shortage D
Q* Quantity
Qs Qd
Michael R. Baye, Managerial Economics and Business
Full Economic Price
The dollar amount paid to a firm under a price
ceiling, plus the nonpecuniary price.
PF = Pc + (PF - PC)
PF = full economic price
PC = price ceiling
PF - PC = nonpecuniary price
P*
Qd Q* QS Quantity
Michael R. Baye, Managerial Economics and Business
Comparative Static Analysis
How do the equilibrium price and quantity
change when a determinant of supply and/or
demand change?
P0
P*
Quantity of PCs
Q 0 Q*
Michael R. Baye, Managerial Economics and Business
So, the Big Picture is:
PC prices are likely to fall, and more computers will be
sold
Use this to organize an action plan
contracts/suppliers?
inventories?
human resources?
marketing?
do I need quantitative estimates?
etc.
P1
P0
D*
Q0 Q1 Quantity of
Software
Michael R. Baye, Managerial Economics and Business
The big picture for the software maker:
Software prices are likely to rise, and more software
will be sold
Use this to organize an action plan