Corn s 12000 10000 7000 4000 1000 d 2 4 6 78

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Unformatted text preview: 16,000 P $5 S 3 2 Shortage 1 25 Market Equilibrium: Putting Demand and Supply Together Surplus 4 o Q of Corn CORN MARKET CORN MARKET PQ $5 4 3 2 1 S 12,000 10,000 7,000 4,000 1,000 D 2 4 6 78 ManagerialQuantity Economics 101112 14 16 Q of Corn 26 Market Equilibrium: Putting Demand and Supply Together How Markets Eliminate Surpluses and Shortages Market Equilibrium Market equilibrium A situation where quantity demanded equals quantity supplied. Surplus A situation in which the quantity supplied is greater than the quantity demanded. Competitive market equilibrium A market equilibrium with many buyers and many sellers. The Effect of Surpluses and Shortages on the Market Price Shortage A situation in which the quantity demanded is greater than the quantity supplied. 27 Managerial Economics 28 Managerial Economics 7 The Effect of Demand and Supply Shifts on Equilibrium The Effect of Shifts in Supply on Equilibrium The Effect of Demand and Supply Shifts on Equilibrium The Effect of Shifts in Demand on Equilibrium The Effect of a Decrease in Supply on Equilibrium The Effect of an Increase in Demand on Equilibrium 29 Managerial Economics 30 Managerial Economics The Effect of Demand and Supply Shifts on Equilibrium The rationing function of price The Effect of Shifts in Demand and Supply over Time The rationing function of price is the change in rationing market price to eliminate the imbalance between quantities supplied and demanded. The Demand for Chicken Has Increased More Than the Supply 31 Managerial Economics 32 Managerial Economics 8 Examples Examples Assume that the demand function for the automobile industry is Assume that the parameters of the demand function are known, as shown in the following equation Q a1P a 2 PI a 3 I a 4 Pop a 5i a 6 A Q = The number of new domestic automobiles demanded during a given year (in millions) P = Average price of new domestic cars (in $) PI = The average price for new import cars (in $) The average price for new import cars (in $) I = Disposable income per household (in $) Pob = Population (in millions) i = Average interest rate on car loans (in percent) A = Industry Advertising expenditures ( in $ millions) The coefficients (a’s) are called the parameters of the demand function. (a’s) 33 Q 500P 210Px 200I 20000Pop 1000000i 600A Automobile demand falls by 500 for each $1 increase in the average price charged by domestic manufacturers It rises by 210 with every $1 increase in the average price of new luxury cars (Px), a prime substitute It increases by 200 for each $1 increase in disposable income per household (I) It increases by 20,000 with each additional million persons in the population (Pop) It decreases by 1 million for every 1 percent rise in interest rates (i) It increases by 600 with each unit ($1 million) spent on advertising 34 (A). Managerial Economics Managerial Economics Table 1 Examples Examples Independent variable (1) Industry Industry Demand: Overall industry demand is subject to general economic influences (population, GDP,...
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