Chapter 2.docx-Market Forces: Demand and...
Chapter_2.docx-Market Forces: Demand and Supply Supply
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Chapter 2.docx-Market Forces: Demand and Supply Su...
Chapter_2.docx-Market Forces: Demand and Supply Supply
Chapter 2.docx-Market Forces: Deman...
Chapter_2.docx-Market Forces: Demand and Supply Supply
Page 3
Q
x
d
= f(P
x
, P
y
, M, H)
The demand funcon explicitly recognizes that the quality of a good consumed depends on its
price and on demand shiſters
Linear Demand Funcon – a representaon of the demand funcon in which the demand for a given
good is a linear funcon of process, income levels, and other variables influencing demand
Q
x
d
= α
0
+ α
x
P
x
+ α
y
P
y
+ α
M
M + α
H
H
The α
i
are fixed numbers that the firms research department or an economic consultant typically
provides to the manager
Example: A firms markeng manager was provided with an esmate of the demand funcon for the
firms product
Q
x
d
= 12,000 - 3P
x
+ 4P
y
- 1M + 2A
x
where A
x
is the amount spent on adversing,
supposed good X sells for $200 per unit, good Y sells for $15 per unit, the company ulizes 2000
units of adversing and consumer income is $10,000
How much of good X do consumers purchase, are goods X and Y substutes or complements
and is good X a normal or an inferior good?
Q
x
d
= 12,000 – (3)(200) + (4)(15) – (1)(10,000) + (2)(2,000) = 5,460 units
Since the coefficient of P
y
in the demand equaon is > 0 we know that with a $1 increase in the
price of good Y will increase the consumpon of good X but 4 units and are thus substutes
Since the coefficient of M in the demand equaon < 0 we know that with a $1 increase in
income will decrease the consumpon of good X by 1 unit and thus good X is an inferior good
Since a demand curve is the relaon between price and quanty, a representave demand curve holds
everything but price constant; to obtain this formula insert values of the demand shiſts into the
demand funcon but leaving P
x
in the equaon to allow for various values
Example:
Q
x
d
= 12,000 – (3)(P
x
) + (4)(15) – (1)(10,000) + (2)(2,000) which simplifies to
Q
x
d
= 6,060 -3P
x
Inverse Demand Funcon – price on the leſt-hand side and everything else on the right-hand side which
reveals how much consumers are willing and able to pay for each addional unit of good X
Consumer Surplus – the value consumers get from a good but do not have to pay for
This concept is important to managers because it tells how much extra money consumers would
be willing to pay for a given amount of a purchased product and can use the noon to
determine the total amount consumers would be willing to pay or mulunit packages
The area above the price paid for a good but below the demand curve


Page 4
Market Supply Curve – a curve indicang the total quanty of a good that all producers in a compeve
market would produce at each price, holding input prices, technology, and other variables
affecng supply constant
Change in Quanty Supplied – changes in the price of a good lead to a change in the quanty supplied of
that good; corresponds to a movement along a given supply curve
The fact that the market supply curve slopes upward reflect the inverse law of supply – as the price of a
good rises(falls) and other things remain constant, the quanty supplies of the good rises (falls)
Producers are willing to produce more output when the price is high than when it is low
Change in Supply – changes in variables other than the price of a good, such as input prices or
technological advances, lead to a change in supply; corresponds to a shiſt of the enre supply
curve
Input Prices – as producon costs change, the willingness of producers to produce output at a given
price changes
As the price of an input rises, producers are willing to produce less output at each given price;
decrease in the supply is depicted as a leſtward shiſt in the supply curve
Technology or Government Regulaons – changes that make it possible to produce a given output at a
lower cost has the effect of increasing supply
Natural disasters that destroy exisng technology and governmental regulaons, such as
emission standards that have an adverse effect on business, shiſt the supply curve to the leſt
Number of Firms – as addional firms enter an industry, more and more output are available at each
given price which is reflected by a rightward shiſt in the supply curve
As firms leave an industry, fewer units are sold at each price and the supply decreases (shiſts to
the leſt)
Substutes in Producon – many firms have technology that are readily adaptable to several different
products, switching to a different producon line will shiſt the supply curve as well
Excise Tax - tax on each unit of output sold where the tax revenue is collected from the supplier which
shiſts the supply curve up by the amount of the tax and producers are willing to sell less aſter
the tax than before


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