Archer Jean Cathy
Alfred Marshall
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
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
Contributions to Modern Economics
1. Supply & demand curve
2. Elasticity of demand
3. Consumer surplus
4. Producer surplus
Supply & Demand Curve
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
Price is a reflection of supply and demand
Shifts in DemandDemand Increases Demand Decreases
Shifts in SupplySupply Increases Supply Decreases
EquilibriumGoods are being distributed efficiently because the amount being supplied is exactly the same as the amount being demanded
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
Elasticity of
Demand
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×
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
Consumer Surplus
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
Calculation of Consumer Surplus
• Consumer surplus equals the area of the green triangle
• ½(5 × 5) = 12.5
Calculations with Price floor and Price Ceiling
• Consumer surplus equals the area of the green triangle
• ½(4 × 4) = 8
Producer Surplus
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
Calculation of Producer Surplus
• Producer surplus equals the area of the pink triangle
• ½(5 × 5) = 12.5
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
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
THE END!