Slide 1Chapter OutlineSlide 3Market Demand CurveSlide 5Changes in DemandDemand ShiftersAdvertising and the Demand for ClothingThe Demand FunctionThe Linear Demand FunctionUnderstanding the Linear Demand FunctionThe Linear Demand Function in ActionInverse Demand FunctionGraphing the Inverse Demand Function in ActionSlide 15Market Demand and Consumer Surplus in ActionSlide 17Changes in Quantity SuppliedSlide 19Slide 20Slide 21Slide 22The Supply FunctionThe Linear Supply FunctionSlide 25Slide 26Inverse Supply FunctionSlide 28Slide 29Slide 30Market Equilibrium ISlide 32Price RestrictionsPrice Ceiling in Action IPrice Ceiling in Action IIPrice Floor in Action IPrice Floor in Action IISlide 38Slide 39Slide 40Slide 41Change in Supply in ActionSimultaneous Shifts in Supply and DemandSimultaneous Shifts in Supply and Demand in ActionSlide 45CHAPTER 2Market Forces: Demand and Supply © 2014 by McGraw-Hill Education. All Rights Reserved.Chapter Outline•Demand–Factors that change quantity demanded and demand –The demand function–Consumer surplus•Supply–Factors that change quantity supplied and supply–The supply function–Producer surplus•Market equilibrium•Price restrictions and market equilibrium–Price ceilings–Price floors•Comparative statics–Changes in demand–Changes in supply–Simultaneous shifts in supply and demandCopyright © 2014 by the McGraw-Hill Companies, Inc. All rights reserved.2-2Chapter Overview•Market demand curve–Illustrates the relationship between the total quantity and price per unit of a good all consumers are willing and able to purchase, holding other variables constant. •Law of demand–The quantity of a good consumers are willing and able to purchase increases (decreases) as the price falls (rises).2-3Copyright © 2014 by the McGraw-Hill Companies, Inc. All rights reserved.DemandDemandMarket Demand CurveCopyright © 2014 by the McGraw-Hill Companies, Inc. All rights reserved. 2-4Quantity(thousands per year)Price ($)Demand$400$30$202040$1060 80Demand•Changing only price leads to changes in quantity demanded.–This type of change is graphically represented by a movement along a given demand curve, holding other factors that impact demand constant.•Changing factors other than price lead to changes in demand.–These types of changes are graphically represented by a shift of the entire demand curve.Copyright © 2014 by the McGraw-Hill Companies, Inc. All rights reserved.2-5DemandChanges in Quantity DemandedChanges in DemandCopyright © 2014 by the McGraw-Hill Companies, Inc. All rights reserved. 2-6Quantity0PriceD1Increase in demandDemandABD0D2Decrease in demandDemand Shifters•Income–Normal good–Inferior good•Prices of related goods–Substitute goods–Complement goods•Advertising and consumer tastes–Informative advertising–Persuasive advertising•Population•Consumer expectations•Other factors Copyright © 2014 by the McGraw-Hill Companies, Inc. All rights reserved. 2-7DemandAdvertising and the Demand for ClothingCopyright © 2014 by the McGraw-Hill Companies, Inc. All rights reserved. 2-8Quantity of high-style clothing0$50$4050,000Price of high-style clothingD260,000Due to an increase in advertisingDemandD1•The demand function for good X is a mathematical representation describing how many units will be purchased at different prices for X, the price of a related good Y, income and other factors that affect the demand for good X.Copyright © 2014 by the McGraw-Hill Companies, Inc. All rights reserved. 2-9DemandThe Demand Function•One simple, but useful, representation of a demand function is the linear demand function:, where:– is the number of units of good X demanded;– is the price of good X;– is the price of a related good Y;– is income;– is the value of any other variable affecting demand.• Copyright © 2014 by the McGraw-Hill Companies, Inc. All rights reserved. 2-10DemandThe Linear Demand Function•The signs and magnitude of the coefficients determine the impact of each variable on the number of units of X demanded.•For example:– by the law of demand;– if good Y is a substitute for good X;– if good X is an inferior good.• Copyright © 2014 by the McGraw-Hill Companies, Inc. All rights reserved. 2-11DemandUnderstanding the Linear Demand Function•Suppose that an economic consultant for X Corp. recently provided the firm’s marketing manager with this estimate of the demand function for the firm’s product: Question: How many of good X will consumers purchase when per unit, per unit, and ? Are goods X and Y substitutes or complements? Is good X a normal or an inferior good?Answer: units. Goods X and Y are substitutes. Good X is an inferior good.• Copyright © 2014 by the McGraw-Hill Companies, Inc. All rights reserved. 2-12DemandThe Linear Demand Function in ActionInverse Demand Function•By setting and and the demand function isthe linear demand function simplifies toSolving this for in terms of results in , which is called the inverse demand function. This function is used to construct a market demand curve.• Copyright © 2014 by the McGraw-Hill Companies, Inc. All rights reserved. 2-13DemandGraphing the Inverse Demand Function in ActionCopyright © 2014 by the McGraw-Hill Companies, Inc. All rights reserved. 2-14QuantityPrice��=2,020 −13��� $2,02006,060Demand•Marketing strategies – like value pricing and price discrimination – rely on understanding consumer value for products. –Total consumer value is the sum of the maximum amount a consumer is willing to pay at different quantities.–Total expenditure is the per-unit market price times the number of units consumed.–Consumer surplus is the extra value that consumers derive from a good but do not pay extra for.Copyright © 2014 by the McGraw-Hill Companies, Inc. All rights reserved. 2-15Consumer SurplusDemandQuantity in litersPrice per literDemand$50$3$212$14 5Copyright © 2014 by the McGraw-Hill Companies, Inc. All rights reserved. 2-16Total Consumer Value:0.5($5 - $3)x2+(3-0)(2-0) = $8Expenditures: $(3-0) x (2-0) = $6 Consumer Surplus: 0.5($5 - $3)x(2-0) = $2DemandMarket Demand and Consumer Surplus in Action$43Consumer Surplus•Market supply curve –Summarizes the relationship between the total quantity all producers are willing and able to produce at alternative prices, holding other factors affecting supply constant.•Law of supply–As the price of a good rises (falls),