Supply and demand in managerial economics

Topics: Supply and demand, Consumer theory, Price elasticity of demand Pages: 31 (1861 words) Published: October 31, 2014
CHAPTER

2

DEMAND AND SUPPLY

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2– 1

DEFINITION OF DEMAND

Demand is defined as the ability and willingness
to buy specific quantities of goods
in a given period of time
at a particular price, ceteris paribus.

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2– 2

CLASSIFICATION OF GOODS
AND SERVICES


Free goods are goods that have no production
cost.
 Public goods are goods that are for common
use and will benefit everyone.
 Economic goods are goods of value that can
be seen and touched. Economic services are
intangible things (with value) that cannot been
seen or touched.

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2– 3

LAW OF DEMAND
Law of demand states that the higher the price
of a good, the lower is the quantity demanded
for that good and the lower the price, the higher
is the quantity demanded, ceteris paribus.

P ↑ Qdd ↓

P ↓ Qdd ↑

NEGATIVE RELATIONSHIP
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2– 4

DEMAND SCHEDULE AND
CURVE
Demand Schedule

Demand Curve
12

Price

Quantity

5

2

4

4

3

6

6

2

8

4

1

10

2

10
8
DD

0
2

4

6

8

10

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2– 5

INDIVIDUAL AND MARKET
DEMAND
INDIVIDUAL DEMAND
The relationship between the quantity
of a good demanded by a single individual
and its price.
MARKET DEMAND
The relationship between the total quantity
of a good demanded by adding all the quantities demanded
by all consumers in the market and its price.

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2– 6

Consumers’
income

Tastes and
trends

Price of
related goods

Supply of
money in
circulation

Level of taxation

Population or
number of
buyers
DETERMINANTS
OF DEMAND

Festive
seasons and
climate

Expectation
about future
prices

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2– 7

CHANGES IN QUANTITY DEMANDED
VS. CHANGES IN DEMAND
CHANGES IN QUANTITY DEMANDED

CHANGES IN DEMAND
Price

Price

DD





D0

Quantity

Movement along DD curve
Price changes and other factors are
constant
Upward movement  Decrease in
quantity demanded (Contraction)
Downward movement  Increase in
quantity demanded (Expansion)







D1
Quantity

Shift in the demand curve
Occurs when there are changes in
other factors but price remains
constant
Increase in Demand (D0  D1)
Decrease in Demand (D1  D0)
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2– 8

EXCEPTIONAL DEMAND
Exceptional Demand is the opposite of the Law of Demand
where as price increases, demand will also increase and vice versa.

GIFFEN GOODS
SPECULATION
EMERGENCIES
STATUS SYMBOL GOODS
HIGHLY-PRICED GOODS
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2– 9

INTER-RELATED DEMAND
CROSS DEMAND
The demand for a good is also affected by the price of
its substitute or complementary goods. Cross demand can be
divided into two: Joint demand and competitive demand.

DERIVED DEMAND
Derived demand is the demand for a good
which is derived from other goods.

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2– 10

CROSS DEMAND: JOINT DEMAND
VS. COMPETITIVE DEMAND
Cross Demand

Positive relationship exists
between substitute goods
Price of pizza

Price of pizza

DD
Negative relationship exists
between complement
goods

P2

P2

P1

P1
DD
Q1

Q2

Joint Demand

Quantity of soft drinks

Q1

Q2

Quantity of
soft drinks

Competitive Demand
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DERIVED DEMAND
Cross Demand

Positive relationship exists
between substitute goods
Wage
Pricerate
of pizza
(RM per hour)

Price (RM’000)
of pizza

S0DD

S0
Negative relationship exists
between complement
goods

P21
P
P0

WR
P21

D1

WR
P10

P1

D1
D0DD
Q1

QQ0 2

Q1 Quantity Quantity
of soft drinks

Demand
Joint Demand
and supply for house

D0
Q01

Q02

Quantity
Quantity
of of
softworkers
drinks

Demand
Competitive
and supply
Demand
for carpenters
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2– 12

INTERRELATED DEMAND
COMPOSITE DEMAND...
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