Managerial Economics & Business

Strategy
Chapter 2
Market Forces: Demand and Supply
McGraw-Hill/Irwin
Michael R. Baye, Managerial Economics and
Business Strategy

Copyright 2008 by the McGraw-Hill Companies, Inc. All rights reserved.
Overview
I. Market Demand Curve
The Demand Function
Determinants of Demand
Consumer Surplus
II. Market Supply Curve
The Supply Function
Supply Shifters
Producer Surplus
III. Market Equilibrium
IV. Price Restrictions
V. Comparative Statics
2-2
Market Demand Curve
Shows the amount of a good that will be
purchased at alternative prices, holding
other factors constant.
Law of Demand
The demand curve is downward sloping.
Quantity
D
Price
2-3
Determinants of Demand
Income
Normal good
Inferior good
Prices of Related Goods
Prices of substitutes
Prices of complements
Advertising and
consumer tastes
Population
Consumer expectations

2-4
The Demand Function
A general equation representing the demand curve
Q
x
d
= f(P
x
,

P
Y
, M, H,)

Q
x
d
= quantity demand of good X.
P
x
= price of good X.
P
Y
= price of a related good Y.
Substitute good.
Complement good.
M = income.
Normal good.
Inferior good.
H = any other variable affecting demand.
2-5
Inverse Demand Function
Price as a function of quantity
demanded.
Example:
Demand Function
Q
x
d
= 10 2P
x
Inverse Demand Function:
2P
x
= 10 Q
x
d
P
x
= 5 0.5Q
x
d

2-6
Change in Quantity Demanded
Price
Quantity
D
0

4 7
6
A to B: Increase in quantity demanded
B
10
A
2-7
Price
Quantity
D
0

D
1

6
7
D
0
to D
1
: Increase in Demand
Change in Demand
13
2-8
Consumer Surplus:
The value consumers
get from a good but do
not have to pay for.
Consumer surplus will
prove particularly
useful in marketing and
other disciplines
emphasizing strategies
like value pricing and
price discrimination.
2-9
I got a great deal!
That company offers a lot
of bang for the buck!
Dell provides good value.
Total value greatly exceeds
total amount paid.
Consumer surplus is large.
2-10
I got a lousy deal!
That car dealer drives a
hard bargain!
I almost decided not to
buy it!
They tried to squeeze the
very last cent from me!
Total amount paid is
close to total value.
Consumer surplus is low.
2-11
Price
Quantity
D
10
8
6
4
2
1 2 3 4 5
Consumer Surplus:
The value received but not
paid for. Consumer surplus =
(8-2) + (6-2) + (4-2) = $12.
Consumer Surplus:
The Discrete Case
2-12
Consumer Surplus:
The Continuous Case
Price $
Quantity
D
10
8
6
4
2
1 2 3 4 5
Value
of 4 units = $24
Consumer
Surplus =
$24 - $8 =
$16
Expenditure on 4 units = $2
x 4 = $8
2-13
Market Supply Curve
The supply curve shows the amount of a
good that will be produced at alternative
prices.
Law of Supply
The supply curve is upward sloping.
Price
Quantity
S
0

2-14
Supply Shifters
Input prices
Technology or
government regulations
Number of firms
Entry
Exit
Substitutes in production
Taxes
Excise tax
Ad valorem tax
Producer expectations
2-15
The Supply Function
An equation representing the supply curve:
Q
x
S
= f(P
x
,

P
R
,W, H,)

Q
x
S
= quantity supplied of good X.
P
x
= price of good X.
P
R
= price of a production substitute.
W = price of inputs (e.g., wages).
H = other variable affecting supply.
2-16
Inverse Supply Function
Price as a function of quantity supplied.
Example:
Supply Function
Q
x
s
= 10 + 2P
x
Inverse Supply Function:
2P
x
= 10 + Q
x
s
P
x
= 5 + 0.5Q
x
s

2-17
Change in Quantity Supplied
Price
Quantity
S
0

20
10
B
A
5
10
A to B: Increase in quantity supplied
2-18
Price
Quantity
S
0

S
1

8
7 5
S
0
to S
1
: Increase in supply

Change in Supply
6
2-19
Producer Surplus
The amount producers receive in excess of the amount
necessary to induce them to produce the good.
Price
Quantity
S
0

Q
*

P
*

2-20
Market Equilibrium
The Price (P) that Balances
supply and demand
Q
x
S
= Q
x
d

No shortage or surplus
Steady-state
2-21
Price
Quantity
S
D
5
6
12
Shortage
12 - 6 = 6
6
If price is too low
7
2-22
Price
Quantity
S
D
9
14
Surplus
14 - 6 = 8
6
8
8
If price is too high
7
2-23
Penetapan Harga
Price Ceilings
Penetapan harga Maksimum.
Contoh di Indonesia:
Penetapan harga BBM .
Price Floors
Penetapan Harga Dasar
Contoh di Indonesia:
Penetapan harga bahan-bahan pertanian seperti
kedelai, beras, gula dll.

2-24
Price
Quantity
S
D
P*
Q*
P
Ceiling
Q
s

P
F

DAMPAK PENETAPAN HARGA
MAKSIMUM
Shortage
Q
d
2-25
2000
3000
10 20 40
Qd>Qs
DAMPAK PENETAPAN HARGA DASAR
Price
Quantity
S
D
P*
Q*
Surplus
P
F

Q
d
Q
S

2-26
3000
2000
10 20 30 Qs>Qd
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Comparative Statics: Analisa yang merubah
keseimbangan
Keseimbangan harga ditentukan oleh kekuatan
supply dan demand.
Supply dan demand ditentukan oleh nilai yang
mempengaruhi supply dan demand
Perubahan satu atau kombinasi dari variabel
yang memempngaruhi demand dan supply akan
menyebabkan perubahan keseimabangan harga
dan kuantitas
Price
Quantity
P
1
Q
1

S
D
Peningkatan dalam Demand:
Demand bergeser ke kanan
Price
Quantity
P
1
Q
1
P
2
Q
2


Membandingkan
dan adalah
Comparative Statics
S
Q
2

Harga bahan baku
turun
S shifts to S
Surplus @ P
1
of Q
1
,
Q
2
Equilibrium @ P
3
,
Q
3

P
Q
S D
P
3
Q
3
Q
1
P
1
Perubahan dalam keseimbangan pasar
D S D
Q
3

P
3
Q
2
Income meningkat
Demand shifts to D
1

Shortage @ P
1
of Q
1
,
Q
2
Equilibrium @ P
3
, Q
3

P
Q Q
1
P
1
Perubahan dalam keseimbangan pasar
D S
Income meningkat dan
harga bahan baku turun
The increase in D is
greater than the
increase in S
Equilibrium price and
quantity increase to
P
2
, Q
2

P
Q
S
P
2
Q
2
D
P
1
Q
1
Perubahan dalam keseimbangan pasar