Managerial Economics reviewer for quiz #2 • Inferior goods – Good for which

demand decreases as income rises.

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

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 Supply Curve
delivery (letters) • Horizontal interpretation of supply.
 Preferences Given price, how much will suppliers offer?
 Dinosaur toys after Jurassic • Vertical interpretation of supply
Park movie Given the quantity to be sold, what will the
 Number of buyers in the market price be?
 Expectations about the future • The seller’s reservation price is the
Price changes never cause a shift in demand marginal cost of producing that good.
It is the smallest dollar amount for which she
Tennis Market would not be worse off if she sold an additional
 If rent for tennis court unit
decreases, demand for tennis
balls increases.
 Tennis courts and tennis balls are
complements
The Law of Supply states that the quantity of a Changes in Supply
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 Causes of Shifts in Supply
thousands)  A change in the price of an input
Problem  Fiberglass for skateboards,
1. What is the quantity of apples construction wages
per year when the average  A change in technology
price of an apples is 2 per  Desktop publishing and term
kilogram? When 3 pesos? When papers
4 pesos?  Internet distribution of
2. Sketch the supply curve for products (e-commerce)
apples. Does this supply curve  Weather (agricultural commodities and
obey the law of supply? outdoor entertainment)
 Number of sellers in the market
Changes in Quantity Supplied  Expectation of future price changes
When the price of a good changes, move to a Price changes never cause a shift in supply
new quantity supplied.
Assumes everything except price is held Market Equilibrium
constant (ceteris paribus) • 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.