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									  Managerial Economics &
     Business Strategy
          Chapter 2
Market Forces: Demand and Supply
          Market Equilibrium

• Balancing supply and demand
        S
    Qx = Qx
              d

• Interaction of supply and
  demand determines the
  equilibrium price
    If price is too low…
Price                           S



   7
   6

   5

              Shortage               D
              12 - 6 = 6
          6     8          12       Quantity
   If price is too high…
             Surplus
Price       14 - 6 = 8
                              S
   9
   8
   7




                                   D


        6        8       14       Quantity
             Price Restrictions
• Price Ceilings
     The maximum legal price that can be charged.
     Examples:
      • Gasoline prices in the 1970s.
      • Housing in New York City.
      • Proposed restrictions on ATM fees.
Impact of a Price Ceiling
 Price                       S

       PF

       P*


P Ceiling

                 Shortage         D


            Qs              Qd   Quantity
                    Q*
              Price Restrictions cont.
• Price Floors
     The minimum legal price that can be charged.
     Examples:
       • Minimum wage.
           – Current PA minimum wage $6.25
               » Increased from $5.15 January 1, 2007
           – Increase to $7.15 by July, 1 2007
       • Agricultural price supports.
   Impact of a Price Floor
Price         Surplus        S
   PF


    P*




                                  D


         Qd       Q*    QS       Quantity
       Do we understand? (number 6)
• Suppose demand and supply are given by Qd=50-P and
  Qs=1/2P-10.
• What are the equilibrium quantity and price in this market?
• Determine the quantity demanded, the quantity supplied and
  the magnitude of the surplus if a price floor of $42 is
  imposed in this market.
• Determine the quantity demanded, the quantity supplied and
  the magnitude of the shortage if a price ceiling of $30 is
  imposed in this market.
• Determine the Full Economic Price paid by the consumers
  Comparative Static Analysis
• How do the equilibrium price and quantity
  change when a determinant of supply and/or
  demand change?
      Applications of Demand and
            Supply Analysis
• Event: The WSJ reports that the prices of PC
  components are expected to fall by 5-8 percent over
  the next six months.
• Scenario 1: You manage a small firm that
  manufactures PCs.
• Scenario 2: You manage a small software company.
       Use Comparative Static
    Analysis to see the Big Picture!
• Comparative static analysis shows how the
  equilibrium price and quantity will change when a
  determinant of supply or demand changes.
       Scenario 1: Implications for a
             Small PC Maker
• Computers are now going to be cheaper to produce
• What curve is impacted??
     supply
Big Picture: Impact of decline in
component prices on PC market
   Price                 S
    of
   PCs                            S*


      P0
      P*



                              D


                             Quantity of PC’s
               Q0   Q*
 Scenario 2: Software Maker
• More people buying computers means
  consumers will want more software
• Which curve is impacted??
Big Picture: Impact of lower PC
 prices on the software market
    Price              S
 of Software

         P1
         P0


                                 D*

                            D


               Q0 Q1       Quantity of
                            Software
      Is this really used?? (number 12)
• You are the manager of an organization in America that
  distributes blood to hospitals in all 50 states and the District
  of Columbia. A recent report indicates that nearly 50
  Americans contract HIV each year through blood
  transfusions. Although every pint of blood donated in the
  US undergoes a battery of nine different tests, existing
  screening methods can detect only the antibodies produced
  by the body’s immune system, not foreign agents in the
  blood. Since it takes weeks or even months for these
  antibodies to build up in the blood, newly infected HIV
  donors can pass along the virus through blood that has
  passed existing screening tests. Happily researchers have
• Developed a series of new tests aimed at detecting
  and removing infections from donated blood before
  it is used in transfusions. The obvious benefit of
  these tests is the reduced incidence of infections
  through blood transfusions. The report indicates
  that the current price of decontaminated blood is $80
  per pint. However, if the new screening methods are
  adopted, the demand and supply for decontaminated
  blood will change to Qd=175-P and Qs=2P-200.
     What price do you expect to prevail if the new screening methods
      are adopted?
     How many units of blood will be used in the US?
     What is the level of Consumer Surplus and Producer Surplus?
      Illustrate your findings in a graph
         What if BOTH supply and
              demand shift?
• Depends on the magnitudes and directions of the
  shifts
• Examples….
  Chapter 2 homework


Numbers 7, 10, and 13

								
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