2. Market Forces: Demand And Supply

3. Samsung and Hynix Semiconductor to Cut Chip Production
Sam Robbins, owner and CEO of PC
Solution, arrived at the office and glanced at
the front page of The Wall Street Journal
waiting on his desk.
One of the articles contained statements from
executives of two of South Korea’s largest
semiconductor manufactures (Samsung
Electronics Company and Hynix Semiconductor),

4. Samsung and Hynix Semiconductor to Cut Chip Production (continued)
Indicating that they would suspend all their
memory chip production for one week. The
article went on to say that another large
semiconductor manufacturer was likely to
follow suit. Collectively, these three chip
manufacturer produce about 30 percent of
the world’s basic semiconductor chips.

5. Samsung and Hynix Semiconductor to Cut Chip Production (continued)
PC Solutions is a small but growing company that assembles PCs and
sells them in the highly competitive market for “clones.” PC Solutions
experienced 100 percent growth last year and is in the process of
interviewing recent graduates in attempt to double its workforce.
After reading the article, Sam picked up the phone and called a few of
his business contacts to verify for himself the information contained in
the Journal. Satisfied that the information was correct, he called the
director of personnel, Jane Remark. What do you think they
discussed?

6. Demand Market demand curve:
a curve indicating the total quantity of a good all consumers are willing and able to purchase at each possible price, holding the price of related goods, income, advertising, and other variables constant.

7. The Demand Schedule For Product A
Price Of product A
Quantity of Product A Sold
Average Consumer Income
Advertising Expenditure
Average Price of Product B
80 000
25 000
50 000 20 5
70 000 10
60 000 15
40 000 25
30 000 30
20 000 35
10 000 40

8. The Demand Curve
Figure 2-1 Page 37.
The demand curve.

9. Demand (continued) Change in quantity demanded:
changes in the price of a good lead to a change in the quantity demanded of that good. This corresponds to a movement along a given demand curve.

10. Demand (continued) Change in demand:
changes in variables other than the price of a good, such as income or price of another good, lead to a change in demand. This corresponds to a shift of entire demand curve.

11. Demand Shifter: Because: - Income, - Prices of related goods,
- Advertising and consumer tastes,
- Population,
Consumer expectations.
Figure 2-2 Page 38.
Changes in demand

12. Demand Shifter (continued):
INCOME:
- Normal good:
a good for which an increase (decrease) in
income leads to an increase (decrease) in the
demand for that good.
- Inferior good:
income leads to a decrease (increase) in the

13. Demand Shifter (continued):
PRICES OF RELATED GOODS:
- Substitutes:
goods for which an increase (decrease) in the price of one good leads to an increase (decrease) in the demand for the other good.
- Complements:
goods for which an increase (decrease) in the price of one good leads to a decrease (increase) in the demand for the other good.

14. Advertising and Demand for Product A
Figure 2-3 Page 40.
Increase in advertising

15. The Demand Function Qdx =f (Px, Py, M, H)
Qdx = a0 + a1 Px + a2 Py + a3 M + a4 H
Qdx : the quantity demanded of good X
f : function
Px: the price of good X
Py: the price of a related good
M: income
H: value of any other variable that affects demand

16. Linear Demand Function
Qdx = a0 + a1Px + a2Py + a3M + a4H

17. Case: Qdx = 12000 – 3 Px + 4 Py – 1 M + 2 A M: income A: advertising
- How much of good X do consumers purchase?
- Are good X and Y substitutes or complements?
- Is good X a normal or an inferior good?

18. Case:
Qdx = – 3(200) + 4(15) – 1 (10000)
+ 2 (2000)
= 5460

19. Consumer Surplus: The value consumers get from a good but
do not have to pay for.
Figure 2-5 Page 44.
Consumer surplus

20. Supply
Market supply:
a curve indicating the total quantity of a good that all producers in a competitive market would produce at each price, holding input prices, technology, and other variables affecting supply constant.

21. Figure 2-6 Page 46 (Changes in Supply).

22. Supply (continued) Change in quantity supplied:
changes in the price of a good lead to a change in the quantity supplied of that good. This corresponds to a movement along a given supply curve.

23. Supply (continued) Change in supply:
changes in variables other than the price of a good, such as input prices or technological advances, lead to a change in supply. This corresponds to a shift of the entire supply curve.

24. Supply Shifters Affected by: - Input prices,
- Technology or government regulations,
- Number of firms,
- Substitutes in production,
- Taxes,
- Producer expectations.

25. Supply Shifters (continued)
A per unit tax
Figure 2-7 Page 48

26. The Supply Function Qsx = f (Px, Pr, W, H)
Qsx = b0 + b1 Px + b2 Pr + b3 W + b4 H
Qsx: the quantity supplied of a good
f: function
Px: price of the good
Pr: price of technologically related goods
W: price of an input
H: the value of some other variable that affects supply

27. Linear Supply Function
Qsx = b0 + b1 Px + b2 Pr + b3 W + b4 H
Qsx = Px

28. Producer Surplus: The amount producers receive in excess
of the amount necessary to induce them to
produce the good.
Figure 2-9 Page 51

29. Market Equilibrium
Qd = Qs
Figure 2-10 Page 52.
Surplus?
Shortage?

30. Case:
Qd = 10 – 2P
Qs = 2 + 2P
Determine the competitive equilibrium (Q=?;
P=?)?

31. Price Restrictions And Market Equilibrium
Price ceiling:
the maximum legal price that can be charged in a market.
Figure 2-11 Page 55

32. Price Restrictions And Market Equilibrium (continued)
Price floor:
the minimum legal price that can be charged in a market.
Figure 2-12 Page 58

33. Comparative Statics (changes In Demand)
Effect the increase in demand of rental cars as the consumer incomes are expected to rise by about 2.5 percent.
Figure 2-13 Page 60.

34. Comparative Statics (changes In Supply)
Effect higher input prices
Figure 2-14 Page 62.

35. Homework: The demand for good X is given by:
Qx = 1200 – 0.5 Px Py – 8 Pz
+ 0.1M
Py = 5900
Pz = 90
M = 55000
a. Indicate whether goods Y and Z are substitutes or
complements for good X.
b. Is X an inferior or normal good?
c. How many units of good X will be purchased when
Px = 4910

36. Homework: The X Corporation produces a good X that is normal good.
Its competitor the Y Corporation makes a substitute good
that it markets under the name “Y”. Good Y is an inferior
good.
How will the demand for good X change if consumer incomes increase?
How will the demand for good Y change if consumer income decrease?
How will the demand for good X change if the price of good Y decrease?
Is good Y a lower quality product than good X? Explain.