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!