Fundamental Economic Concepts

Chapter 2
• Demand and Supply Review
• Total, Average, and Marginal Analysis
• Finding the Optimum Point
• Present Value, Discounting & Net Present Value
• Risk and Expected Value
• Probability Distributions
• Standard Deviation & Coefficient of Variation
• Normal Distributions and using the z-value
• The Relationship Between Risk & Return
Demand Curves
•Individual
Demand Curve the
$/Q greatest quantity of a good
demanded at each price the
consumers are willing to buy,
holding other influences constant

$5

20 Q /time unit
FIGURE 2.1 Demand and Supply
Determine the Equilibrium Market Price
FIGURE 2.2 The Diamond-Water
Paradox Resolved
 Jenny + Pete + … = Market
• The Market Demand Curve
is the horizontal sum
of the individual
demand curves.

• The Demand Function 4 3 7

includes all variables
that influence the [2.1] A demand function for hybrid cars:
quantity demanded
Q = f( P, Ps, Pc, Y, A, AC N, PE, TA, T/S)
- + - + + - + + + -
The signs below each variable indicate the
impact the variable has on Q (hybrid cars), as in
the partial impact of price on quantity, ∂Q/∂P <
0. See Variable definitions are on the next slide.
See also Table 2.2.
 Determinants of the
Quantity Demanded
i. price, P • The list of variables
ii. price of substitute goods, Ps that could likely
affect the quantity
iii. price of complementary goods, Pc demand varies for
iv. income, Y different industries
v. advertising, A and products.
vi. advertising by competitors, Ac • The ones on the left
tend to be
vii. size of population, N, significant.
viii. expected future prices, Pe
xi. adjustment time period, Ta
x. taxes or subsidies, T/S
Figure 2.3 Shifts in Demand
Supply Curves

•Firm Supply Curve -

the greatest
$/Q quantity of a good
supplied at each
price the firm is
profitably able to
supply, holding
other things
constant.
Q/time unit
• The Market Supply Curve is
the horizontal sum of the Acme Inc. + Universal Ltd. + … = Market
firm supply curves.

• The Supply Function includes

all variables that influence
the quantity supplied

2200 3100 7300

[2.2] is the supply function:
Q = g( P, PI, PUI, T, EE, F, RC, PE, TA, T/S)

+ - - + + - - - + -
The signs below each variable indicate the
impact the variable has on Q (hybrid car
supply), as in the partial impact of price on
quantity, ∂Q/∂P > 0. See Variable
definitions are on the next slide. See also
table 2.3.
 Determinants of the Supply Function
i. price, P
ii. input prices, PI, e.g., sheet metal
iii. Price of unused substitute inputs, PUI, such as fiberglass
iv. technological improvements, T
v. entry or exit of other auto sellers, EE
vi. Accidental supply interruptions from fires, floods, etc., F
vii. Costs of regulatory compliance, RC
viii. Expected future changes in price, PE
ix. Adjustment time period, TA
x. taxes or subsidies, T/S

Note: Anything that shifts supply can be included and varies for different
industries or products.