Managerial Economics reviewer for quiz #2
demand decreases as income rises.
Demand, Supply, Equilibrium
Learning Objectives
1. How the demand curve summarizes
the behavior of buyers in the
marketplace.
2. How the supply curve summarizes
the behavior of sellers in the
marketplace.
3. How the supply and demand curves
interact to determine the equilibrium
price and quantity.
4. How shifts in supply and demand
curves cause prices and quantities
to change.
5. The relationship between individual
demand and supply curves with
market demand and supply curves.
- Behavior of the seller > to gain
profit> seller can be buyer
- Behavior of buyer> satisfaction >
benefits
 Buyers and sellers have different
motivations
 Buyers want to benefit from
the good.
 Sellers want to make a profit
 Market price balances two forces
 Value buyers derive from the
good
 Cost to produce one more
unit of the good
Market price are determined by cost and
value)
( IN ECONOMICS WHEN BUYER WILL
INTERACT WITH SELLER IT IS CALLED
MARKET ECONOMICS )
MARKETING- price communicate the value
*HIGH VALUE * HIGH PRICE – (Alfred
Marshall – German economist, cost and
value determines the price)
*Forces of market price
Value
Cost
Kinds of Goods
• Inferior goods – Good for which
(low demand, high income)
• Normal goods - Good for which
demand increases as income rises.
(high demand, high income)
• Substitutes goods – Goods such as
tacos and pizza, if an increase in the
price of one shifts the demand for
the other rightward (increase in the
price of one shifts the demand of the
other (rightward) or increase)
• Complementary goods - Goods such
as coke and pizza, if an increase in
the price of one shifts the demand
for the other leftward. (increase in
the price of one shifts the demand
for the other (leftward) or decrease)
Demand
 Demand
 the amount of some good or
service consumers are willing
and able to purchase at each
price (something that you are
willing to purchase)
 Quantity demanded
 The total number of units
purchased at specific price
 Movement along the demand
curve ( movement along the
demand curve)
In late nineteenth century, Alfred Marshall
first to show clearly how cost and value
interact to determine market price.
Horizontal interpretation of demand.
Given price, how much will buyers buy?
Vertical interpretation of demand. Given
the quantity to be bought, what will the
price be?
 Downward slope
• Consumers buy less at higher prices
• Consumers buy more at lower prices
 Law of Demand
• Inverse relationship between the
price of a good and the quantity
buyers are willing to purchase in a
defined time period, ceteris paribus
(all else remains the same).
LAW OF DEMAND
• States that there is an inverse
relationship between price and
quantity demanded
P = average price of an
automobile (in thousands)
Problem
1. What is the quantity of
automobiles demanded per
year when the average price
of an automobile is 15,000
pesos, when it is 25,000
pesos? When it is 35, 000
pesos?
2. Sketch the demand curve for
automobiles. Does this
demand curve obey the law
of demand?

Reasons why demand curve is downward

sloping: Substitution Effect: As pizza
becomes more expensive, a consumer
may switch to other foods that substitute
for pizza

• Income Effect: A higher price

lowers the purchasing power of a
consumer, resulting in reduced
consumption
 Suppose the demand for new
automobiles in Philippines is
described by the equation
Qd = 12 – 0.1P
Where:
Qd = number of new
automobiles demanded per year (in Shift in Demand
millions) If buyers are willing to buy more at each price,
then demand has increased
Move the entire demand curve to the right
Increase in demand
If buyers are willing to buy less at each price,
then demand has decreased

Change in price does not shift demand curve.

Causes of Shifts in Demand

 Price of complementary goods
 Tennis courts and tennis balls
 Price of substitute goods
 Internet (email) and overnight
delivery (letters)
 Preferences
 Dinosaur toys after Jurassic
Park movie
 Number of buyers in the market
 Expectations about the future
Price changes never cause a shift in demand
Tennis Market
 If rent for tennis court
decreases, demand for tennis
balls increases.
 Tennis courts and tennis balls are
complements
Supply Curve
• Horizontal interpretation of supply.
Given price, how much will suppliers offer?
• Vertical interpretation of supply
Given the quantity to be sold, what will the
price be?
• The seller’s reservation price is the
marginal cost of producing that good.
It is the smallest dollar amount for which she
would not be worse off if she sold an additional
unit
The Law of Supply states that the quantity of a
good offered increases when the price of this
good increases.
 Suppose the yearly supply of apples in
Philippines is described by the equation
Qs = 4 + 3P
Where:
Qs = number of apples
produced per year (millions of metric tons)
P = average price of apples (in
thousands)
Problem
1. What is the quantity of apples
per year when the average
price of an apples is 2 per
kilogram? When 3 pesos? When
4 pesos?
2. Sketch the supply curve for
apples. Does this supply curve
obey the law of supply?
Changes in Quantity Supplied
When the price of a good changes, move to a
new quantity supplied.
Assumes everything except price is held
constant (ceteris paribus)
Changes in Supply
Causes of Shifts in Supply
 A change in the price of an input
 Fiberglass for skateboards,
construction wages
 A change in technology
 Desktop publishing and term
papers
 Internet distribution of
products (e-commerce)
 Weather (agricultural commodities and
outdoor entertainment)
 Number of sellers in the market
 Expectation of future price changes
Price changes never cause a shift in supply
Market Equilibrium
• Quantity supplied equals quantity
demanded AND
• Price is on supply and demand curves
• No tendency to change P or Q
• Buyers are on their
demand curve
• Sellers are on their
supply curve
 Economic Naturalist
 Why do the prices of some goods, like
airline tickets to Europe, go up during
Supply and Demand Shifts: Four Rules the months of heaviest consumption,
while others, like sweet corn, go down?
 Airline ticket prices go up because
demand increases.
 Sweet corn prices go down because
supply increases.