Maseco

• Such managers should be able to understand the way market works, and they should be able to predict prices and the production level of goods, resources, and services related to their business
• One should be able to understand how market forces create both opportunities and constraints for profitable decision making
• Quantity demanded


  The amount of goods and services consumers are willing and able to purchase during a given period of time
• 3 types of demand relation

  • General demand function
  • Direct demand function
  • Inverse demand function
• General demand function


  The relation between quantity demanded and the six factors that affect quantity demanded
• Direct demand function


  Derived from the general demand function by holding all variables constant except price
• Direct demand function example


  • Suppose our income is 60,000 and our related price is 200
• Inverse demand function


  The demand function when price is expressed as a function of quantity demanded
• Factors affecting supply


  • Price of related goods
  • Cost of inputs
  • Technology
  • Government involvement
  • Number of sellers
  • Seller expectations
• Substitute in production


  Goods for which an increase in the price of one good relative to the price of another good causes producers to increase production of the now higher-priced good and decrease the production of the other good
• Complements in production


  Goods for which an increase in the price of one good, relative to the price of another good, causes producers to increase production of both goods
• General supply function


  Shows how all six supply factors jointly determine the quantity supplied
• Direct supply function


  Shows the relation between quantity supplied and price, when all other variables are held constant
• Changes in quantity supplied

  • Increase in supply (better technology, less expensive inputs, more subsidies/less tax)
  • Decrease in supply (deteriorating technology, higher expected price in the future, more taxes, less sellers/firms)
• Market equilibrium


  A situation in which, at the prevailing price, consumers can buy all of the good they wish and producers can sell all of the good they wish
• Equilibrium price


  The price at which quantity demanded is equal to quantity supplied
• Equilibrium quantity


  The amount of a good bought and sold in market equilibrium
• Surplus


  The quantity supplied exceeds the quantity demanded
• Shortage


  The quantity demanded exceeds the quantity supplied
• Consumer surplus


  The difference between the economic value of a good and the price of the good, which is the net gain to the consumer
• Consumer surplus example


  • You're willing to pay up to $100 for a new smartphone, but it's actually on sale for $80. Your consumer surplus would be $20.
• Producer surplus


  The difference between the market price received and the minimum price producers would accept to supply, which is the excess revenue earned by a producer
• Producer surplus example


  • A farmer produces wheat and is willing to supply 100 tons at $100/ton, but the market price is $120/ton. The farmer has a producer surplus of $20/ton, earning an extra $2000 total.
• Social surplus


  The net gain to society as a whole, found by adding total consumer surplus and total producer surplus
• Social surplus example


  • In the fresh tomatoes market, the consumer surplus is $60 and the producer surplus is $20, so the social surplus is $80.
• Quantitative forecast


  A forecast that predicts both the direction and the magnitude of the change in an economic variable
• Qualitative forecast


  A forecast that predicts only the direction in which an economic variable will move
• When supply increases and demand is constant


  Equilibrium price falls and equilibrium quantity rises
• When supply decreases and demand is constant


  Equilibrium price rises and equilibrium quantity falls
• Changes in market equilibrium

  • New grilling technology cuts production time in half
  • Price of chicken sandwiches (a substitute) increases
  • Price of hamburgers decreases
  • Price of ground beef triples
  • Human fingers found in multiple burger restaurants
• Indeterminate


  Term referring to the unpredictable change in either equilibrium price or quantity when the direction of change depends upon the shifts in the demand and supply curves
• When demand and supply both shift simultaneously, the change in equilibrium quantity or price can be indeterminate, meaning it can either rise or fall depending upon the relative magnitudes by which demand and supply shift
• Ceiling price


  The maximum price the government permits sellers to charge for a good. When this price is below equilibrium, a shortage occurs.
• Floor price


  The minimum price the government permits sellers to charge for a good. When this price is above equilibrium, a surplus occurs.
• When the government sets a ceiling price below the equilibrium price, a shortage or excess demand results because consumers wish to buy more units of the good than producers are willing to sell at the ceiling price.
• If the government sets a floor price above the equilibrium price, a surplus or excess supply results because producers offer for sale more units of the good than buyers wish to consume at the floor price.