Archer  Jean  Cathy 
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
A curve that shows the equilibrium
between supply and demand
 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
Price is a reflection of supply and
demand
Shifts in Demand
Demand Increases
Demand Decreases
Shifts in Supply
Supply Increases
Supply Decreases
Equilibrium
Goods are being distributed
efficiently because the
amount being supplied is
exactly the same as the
amount being demanded
Disequilibrium
50
Demand
Supply
Product Price
40
Price
Floor
30
• Price above the
equilibrium level
• Supply surplus
Price
Ceiling • Price below the
20
equilibrium level
• Supply
shortage
10
0
0
10
20
30
Quantity
40
50
60
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) = 1
2. Area of the gray triangle
1. ½(2 × 1) = 1
THE END! 