MANAGERIAL

ECONOMICS
14th Edition

BY
MARK HIRSCHEY AND ERIC BENTZEN
Demand and
Supply
CHAPTER 3
Chapter 3
OVERVIEW
 Basis for Demand
 Market Demand Function
 Demand Curve
 Basis For Supply
 Market Supply Function
 Supply Curve
 Market Equilibrium
Chapter 3
KEY CONCEPTS
 demand  supply function
 direct demand  supply curve
 change in the
 utility quantity supplied
 derived demand  shift in supply
 demand function  equilibrium
 market equilibrium
 demand curve price
 change in the  surplus
quantity demanded  shortage
 shift in demand  comparative statics
analysis
 Supply
Basis for Demand

 Direct Demand
 Demand is the quantity customers are willing to buy
under current market conditions.
 Direct demand is demand for consumption.
 Derived Demand
 Derived demand is input demand.
 Firms demand inputs that can be profitably
employed.
Market Demand
Function
 Determinants of Demand
 Demand is determined by price, prices of other
goods, income, and so on.
 Industry Demand Versus Firm Demand
 Industry demand is subject to general economic
conditions.
 Firm demand is determined by economic
conditions and competition.
Demand Curve

 Demand Curve Determination

 Demand curve shows price and quantity relation
holding everything else constant.
 Change in Quantity Demanded
 Quantity demanded falls if price rises.
 Quantity demanded rises if price falls.
 Role of Non-Price Variables
 Change in non-price variables will define a new
demand curve.
Relation Between the
Demand Curve and
Demand Function
 Movements Along Demand Curve
 A rise in price causes upward movement along a
given demand curve.
 A price decline causes downward movement
along a given demand curve.
 Demand Curve Shifts
 Demand increases if a non-price change allows
more to be sold at every price.
 Demand decreases if a non-price change causes
less to be sold at every price.
Basis For Supply

 Firms Offer Supply To Make Profits

 When prices rise, firms boost the quantity supplied.
 When prices fall, firms cut the quantity supplied.
 Everything That Affects Marginal Production Costs
Affects Supply
 If MC falls, supply rises.
 If MC rises, supply falls.
Market Supply
Function
 Determinants of Supply
 Supply is determined by price, prices
of other goods, technology, and so
on.
 Industry Supply Versus Firm Supply
 Firmsupply is determined by
economic conditions and
competition.
 Industry supply is the sum of firm
supply.
Supply Curve

 Supply Curve Determination

 Supply curve shows price and quantity
relation holding everything else
constant.
 The Price-quantity Supplied Relation
 A rise in price will increase the quantity supplied.
 A fall in price will decrease the quantity supplied.
 Along a supply curve, all non-price variables are
held constant
Relation Between Supply
Curve and Supply
Function
 Movements Along Supply Curve
 A rise in price causes upward movement
along a given supply curve.
 A price decline causes downward
movement along a given supply curve.
 Supply Curve Shifts
 Supply increases if a non-price change
allows more to profitably produced and
sold.
 Supply decreases if a non-price change
causes less to be profitably produced and
sold.
Market Equilibrium
 Demand and Supply Balance
Equilibrium exists if perfect balance
exists in the quantities demanded and
supplied.
Equilibrium reflects productive and
allocative efficiency.
 Surplus and Shortage
Surplusis excess supply.
Shortage is excess demand.
Comparative Statics

 Changes in Equilibrium
 Equilibrium exists when there is no economic
incentive for change in demand or supply.
 Changing demand or supply affects equilibrium.
 Comparative Statics
 Study of how equilibrium changes with changing
demand or supply.
 Change continues until a new equilibrium is
established.
© 2016 Cengage Learning
© 2016 Cengage Learning