Archer Jean Cathy. Who is Alfred Marshall?? The 1992 Nobel Prize winner in economics Founder of the...
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Archer Jean Cathy
Alfred Marshall
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Who is Alfred Marshall??• The 1992 Nobel Prize winner in economics
• Founder of the Cambridge School of Economics
• *Author of the famous book called the Principles of Economics
• An opponent to women’s educational degree
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Background Information• Born in a London suburb on 26 July 1842
• Died on 13 July 1924 (age 81)
• Educated at the Merchant Taylor's School
• showed particular interest for mathematics
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Contributions to Modern Economics
1. Supply & demand curve
2. Elasticity of demand
3. Consumer surplus
4. Producer surplus
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Supply & Demand Curve
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Definitions
Demand: how much (quantity) of a product or service is desired by buyers.
Supply: how much the market can offer
Price is a reflection of supply and demand
A curve that shows the equilibrium between supply and demand
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Price is a reflection of supply and demand
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Shifts in DemandDemand Increases Demand Decreases
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Shifts in SupplySupply Increases Supply Decreases
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EquilibriumGoods are being distributed efficiently because the amount being supplied is exactly the same as the amount being demanded
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Disequilibrium
0
10
20
30
40
50
0 10 20 30 40 50 60
Quantity
Prod
uct P
rice Price
Floor
• Price above the equilibrium level• Supply surplus
Price Ceiling
• Price below the equilibrium level• Supply shortage
Demand Supply
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Elasticity of
Demand
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Definition• A formula that measures the change in quantity
demanded due to a price change.
Change in quantity demand
Initial Demand
Initial Price
Change in Price×
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Values• Smaller than 1 - Inelastic
• Small change in price doesn’t create a big effect on the quantity demanded• Good is a necessary• There are no substitutes available• Doesn’t cost a lot (Salt)
• Greater than 1 - Elastic• Small change in price cause a great change in the quantity demanded• The higher the price elasticity, the more sensitive consumers are to price
changes• Good is not a necessary• There are substitutes available• Cost a lot (Pizza)
• Equals to 1 - Unitary elastic• Small changes in price do not affect the total revenue
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Consumer Surplus
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Definition
• The difference between the maximum price that consumers are willing to pay and the price that the consumers are paying for a goods
• Can be calculate from the supply and demand curve
• Adjustable for price ceiling and price floor
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Calculation of Consumer Surplus
• Consumer surplus equals the area of the green triangle
• ½(5 × 5) = 12.5
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Calculations with Price floor and Price Ceiling
• Consumer surplus equals the area of the green triangle
• ½(4 × 4) = 8
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Producer Surplus
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Definition
• The difference between the minimum price that producers are willing to sell and the price that the producers are selling for a goods
• Can be calculate from the supply and demand curve
• Adjustable for price ceiling and price floor
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Calculation of Producer Surplus
• Producer surplus equals the area of the pink triangle
• ½(5 × 5) = 12.5
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Calculations with Price floor and Price Ceiling
• Producer surplus equals the sum of area of the pink triangle and the area of the rectangle
• ½(4 × 4) + (4 × 2) = 16
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Deadweight Loss Calculation• Deadweight loss is the loss of consumer and
producer surplus from government intervention
• Deadweight loss can be calculate in two ways:
1. (Sum of producer and consumer surplus without price floor and ceiling) – (Sum of producer and consumer surplus with price floor and ceiling)1. (12.5 + 12.5) – (8 +
16) = 12. Area of the gray triangle
1. ½(2 × 1) = 1
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THE END!