Introductory Economics for

Managers
M. Ryan Sanjaya
Overview

I. Market Demand Curve III. Market Equilibrium

 The Demand Function IV. Price Restrictions
 Determinants of Demand
 Consumer Surplus V. Comparative Statics

II. Market Supply Curve

 The Supply Function
 Supply Shifters
 Producer Surplus
 Individual Demand Curve

 Shows the amount of a good that will be purchased at

alternative prices, holding other factors constant by an
individual
 Law of Demand
 The demand curve is downward sloping.
Price

Quantity
 Market Demand Curve

 Shows the total amount of a good that will be

purchased by all consumer at alternative prices,
holding other factors constant.
 How to find market demand curve?
 Theoretical: horizontal summation of individual demand
curve
 Empirical: willingness-to-pay [try at the class]
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
The Demand Function

 A general equation representing the demand

curve
Qxd = f(Px , PY , M, H,)

 Qxd = quantity demand of good X.

 Px = price of good X.
 PY = price of a related good Y.
 Substitute good.
 Complement good.
 M = income.
 Normal good.
 Inferior good.
 H = any other variable affecting demand.
Inverse Demand Function
 Price as a function of quantity demanded.
 Example:
 Demand Function
 Qxd = 10 – 2Px
 Inverse Demand Function:
 2Px = 10 – Qxd
 Px = 5 – 0.5Qxd
Change in Quantity Demanded
Price

A to B: Increase in
A
quantity demanded
10

B
6

D0

4 7 Quantity
Change in Demand
Price
D0 to D1: Increase in Demand

D1

D0

7 13 Quantity
 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.
Consumer Surplus

 

That car dealer drives a
 That company offers a hard bargain!
lot of bang for the buck!  I almost decided not to
 Dell provides good value. buy it!
 When total value greatly  They tried to squeeze
exceeds total amount the very last cent from
me!
paid  Consumer  When total amount paid
surplus is large is close to total value 
Consumer surplus is low
Consumer Surplus: Discrete Case

Price Consumer Surplus:

The value received but not
10
paid for. Consumer surplus =
8 (8-2) + (6-2) + (4-2) = $12.

2
D

1 2 3 4 5 Quantity
 Consumer Surplus: Continuous Case

Price $

10
Value
Consumer 8 of 4 units = $24
Surplus =
$24 - $8 = 6
$16
4 Expenditure on 4 units = $2
x 4 = $8
2
D

1 2 3 4 5 Quantity
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
S0

Quantity
Supply Shifters

 Input prices
 Technology or government
regulations
 Number of firms
 Entry
 Exit
 Substitutes in production
 Taxes
 Excise tax
 Ad valorem tax
 Producer expectations
The Supply Function

 An equation representing the supply curve:

QxS = f(Px , PR ,W, H,)

 QxS = quantity supplied of good X.

 Px = price of good X.
 PR = price of a production substitute.
 W = price of inputs (e.g., wages).
 H = other variable affecting supply.
Inverse Supply Function
 Price as a function of quantity supplied.
 Example:
 Supply Function
 Qxs = 10 + 2Px
 Inverse Supply Function:
 2Px = 10 + Qxs
 Px = 5 + 0.5Qxs
Change in Quantity Supplied

Price
A to B: Increase in quantity supplied
S0

B
20

A
10

5 10 Quantity
Change in Supply
Price S0 to S1: Increase in supply

S0

S1

5 7 Quantity
 Producer Surplus
 The amount producers receive in excess of the amount
necessary to induce them to produce the good.
Price

S0

P*

Q* Quantity
Market Equilibrium

 The Price (P) that Balances

supply and demand
 QxS = Qxd
 No shortage or surplus (no excess)
 Steady-state
If price is too low…
Price
S

Shortage D
12 - 6 = 6

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

6 8 14 Quantity
Price Restrictions

 Price Ceilings
 The maximum legal price that can be charged.
 Examples:
 “Premium” gasoline
 Train ticket during “lebaran”
 Price Floors
 The minimum legal price that can be charged.
 Examples:
 Minimum wage
 Harga pokok gula
Impact of a Price Ceiling
Price
S

PF

P*

P Ceiling

Shortage D

Qs Quantity
Q* Qd
Impact of a Price Floor

Price
Surplus S

PF

P*

Qd Q* QS Quantity
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
 Step 1: Look for the “Big Picture”
 Step 2: Organize an action plan (worry about details).
Big Picture: Impact of decline in
component prices on PC market

Price S
of PCs S*

P0

P*

Q0 Q* Quantity of PC’s
 Big Picture Analysis: PC Market

 Equilibrium price of PCs will fall, and equilibrium

quantity of computers sold will increase.
 Use this to organize an action plan
 contracts/suppliers?
 inventories?
 human resources?
 marketing?
 do I need quantitative estimates?
Scenario 2: Software Maker
 More complicated chain of reasoning to arrive at the
“Big Picture.”
 Step 1: Use analysis like that in Scenario 1 to deduce
that lower component prices will lead to
 a lower equilibrium price for computers.
 a greater number of computers sold.
 Step 2: How will these changes affect the “Big Picture”
in the software market?
Big Picture: Impact of lower PC prices on
the software market
Price S
of Software

P1

P0

D*

Q0 Q1 Quantity of
Software
Big Picture Analysis: Software Market

 Software prices are likely to rise, and more software

will be sold.
 Use this to organize an action plan.
Assignment
 Will be given in class
Group presentation
 20 minutes ±5 minutes of uninterrupted presentation.
Presenting for more/less than 15±5 minutes will be
penalized
 5-10 minutes of Q&A session
 Each presentation must include at least 1 real-life
business/managerial example/case
Group presentation
A good presentation worthy of a full (100%) mark must
satisfy the following:
 Balanced (1/3 theory, 1/3 real-life example, 1/3 analysis
and conclusion)
 The presentation must be related with the topic outlined
above and its minimum scope of analysis
 Understandable (don’t put too much jargon, clear
example is worth more than formal definition, slides must
support your presentation)
 Always assume that your listener are fairly educated
people but with no prior knowledge on the subject being
presented
Group Topic Scope of analysis (minimum)
1 Demand - elasticity
- regression
2 Individual behavior - price and income change
- individual & market demand
3 Production and cost - economies of scale
- input substitution
4 Firm organization - principal-agent problem
- transaction cost
5 Market structure - industry concentration
- structure-conduct-performance (SCP) paradigm
6 Oligopoly - beliefs and strategic interaction
- oligopoly models
7 Pricing & business - price discrimination
strategy - commodity bundling
8 Economics of - risk and uncertainty
information - moral hazard
9 Macroeconomics 1 - macroeconomic variables (GDP, inflation, unemployment)
- stabilization policy (monetary policy, fiscal policy)
10 Macroeconomics 2 - government debt and fiscal deficit
- international trade