1 / 40

Supply and Demand in Economics

Explore the basics of supply and demand, the supply curve, demand curve, market equilibrium, elasticity, and predicting market effects with changing conditions.

buthainah-feroze
Download Presentation

Supply and Demand in Economics

An Image/Link below is provided (as is) to download presentation Download Policy: Content on the Website is provided to you AS IS for your information and personal use and may not be sold / licensed / shared on other websites without getting consent from its author. Content is provided to you AS IS for your information and personal use only. Download presentation by click this link. While downloading, if for some reason you are not able to download a presentation, the publisher may have deleted the file from their server. During download, if you can't get a presentation, the file might be deleted by the publisher.

E N D

Presentation Transcript

  1. Chapter 2 The Basics of Supply and Demand

  2. Supply and Demand • The Supply Curve • The relationship between the quantity of a good that producers are willing to sell and the price of the good Chapter 2

  3. S P2 P1 Q1 Q2 The Supply Curve Price ($ per unit) The Supply Curve, Graphically Depicted The supply curve slopes upward, demonstrating that at higher prices firms will increase output Quantity Chapter 2

  4. The Supply Curve • Other Variables Affecting Supply • Costs of Production • Technology • Prices of alternative outputs • Expected future prices Chapter 2

  5. Supply and Demand • The Demand Curve • The relationship between the quantity of a good that consumers are willing to buy and the price of the good Chapter 2

  6. P2 P1 D Q2 Q1 The Demand Curve Price ($ per unit) The demand curve slopes downward, demonstrating that consumers are willing to buy more at a lower price as the product becomes relatively cheaper. Quantity Chapter 2

  7. The Demand Curve • Other Variables Affecting Demand • Income • Consumer Tastes • Price of Related Goods • Substitutes • Complements Chapter 2

  8. S Price ($ per unit) P0 D Quantity Q0 The Market Mechanism The curves intersect at equilibrium, or market- clearing, price. Quantity demanded equals quantity supplied at P0 Chapter 2

  9. Price ($ per unit) S Surplus P1 P0 D Quantity QD Q0 QS The Market Mechanism • At P1, price is above the market clearing price • Qs > QD • Price falls to the market-clearing price • Market adjusts to equilibrium Chapter 2

  10. Price ($ per unit) S P3 P2 D Shortage Quantity QS QD Q3 The Market Mechanism • At P2, price is below the market clearing price • QD > QS • Price rises to the market-clearing price • Market adjusts to equilibrium Chapter 2

  11. D P S S’ P1 P3 Q1 Q3 Q Q2 Changes in Market Equilibrium • Raw material prices fall • S shifts to S’ • Surplus at P1 between Q1, Q2 • Price adjusts to equilibrium at P3, Q3 Chapter 2

  12. Price Elasticity of Demand • Measures the sensitivity of quantity demanded to price changes • It measures the percentage change in the quantity demanded of a good that results from a one percent change in price Chapter 2

  13. Price Elasticity of Demand • Therefore, elasticity can also be written as: Chapter 2

  14. Price Elasticity of Demand • Usually a negative number • As price increases, quantity decreases • As price decreases, quantity increases • When |EP| > 1, the good is price elastic • |%Q| > |%P| • When |EP| < 1, the good is price inelastic • |%Q| < |% P| Chapter 2

  15. EP = - Price 4 Elastic Ep = -1 2 Inelastic Ep = 0 4 8 Q Price Elasticity of Demand Demand Curve Q = 8 – 2P Chapter 2

  16. Price D P* Quantity Infinitely Elastic Demand EP =  Chapter 2

  17. Price Quantity Completely Inelastic Demand D EP = 0 Q* Chapter 2

  18. Other Demand Elasticities • Income Elasticity of Demand • Measures how much quantity demanded changes with a change in income Chapter 2

  19. Other Demand Elasticities • Cross-Price Elasticity of Demand • Measures the percentage change in the quantity demanded of one good that results from a one percent change in the price of another good Chapter 2

  20. Price Elasticity of Supply • Measures the sensitivity of quantity supplied given a change in price • Measures the percentage change in quantity supplied resulting from a 1 percent change in price Chapter 2

  21. Elasticity: An Application • Supply: QS = 1900 + 24P • Demand: QD = 3550 – 266P Chapter 2

  22. Elasticity: An Application QD = QS 1800 + 240P = 3550 – 266P 506P = 1750 P = $3.46 per bushel Q = 1800 + (240)(3.46) = 2630 million bushels Chapter 2

  23. Elasticity: An Application • We can find the elasticities of demand and supply at these points Chapter 2

  24. Elasticity: An Application • Assume the price of wheat is $4.00/bushel due to decrease in supply, this will reduce quantity demanded to: Chapter 2

  25. Elasticity: An Application • In 2002, the supply and demand for wheat were: • Supply: QS = 1439 + 267P • Demand: QD = 2809 – 226P Chapter 2

  26. Elasticity: An Application QD = QS 2809 - 226P = 1439 + 267P P = $2.78 per bushel Q = 2809 - (226)(2.78) = 2181 million bushels Price of wheat fell in nominal terms. End of L1………….. Chapter 2

  27. Predicting the Effects of Changing Market Conditions • Linear demand and supply must be fit to market data • Given equilibrium price and quantity along with elasticities of supply and demand, we can calculate the curves that fit the information • We can then calculate changes in the market Chapter 2

  28. Predicting the Effects of Changing Market Conditions • Let’s begin with the equations for supply, demand, elasticity: • Demand: Q = a – bP • Supply: Q = c + dP • Elasticity: (P/Q)(Q/P) • We must calculate numbers for a, b, c, and d. Chapter 2

  29. Predicting the Effects of Changing Market Conditions • The slope of the demand curve above equals Q/P which equals-b • The slope of the supply curve above equals Q/P which equals d • THEREFOR: Demand: ED = -b(P*/Q*) Supply: ES = d(P*/Q*) Chapter 2

  30. Supply: Q = c + dP a/b ED = -bP*/Q* ES = dP*/Q* P* -c/d Demand: Q = a - bP Q* Predicting the Effects of Changing Market Conditions Price Quantity Chapter 2

  31. Predicting the Effects of Changing Market Conditions • Using P*, Q* and the elasticities, we can solve for d and c from supply ES = d(P*/Q*) 1.6 = d(0.75/7.5) = 0.1d…..GIVEN d = 16 Q = c + dP 7.5 = c + (16)(0.75) = c + 12 c = -4.5 Chapter 2

  32. Predicting the Effects of Changing Market Conditions • Using P*, Q* and the elasticities, we can solve for a and b from demand ED = –b(P*/Q*) -0.8 = -b(0.75/7.5) = –0.1b b = 8 Q = a – bP 7.5 = a – (8)(0.75) = a – 6 a = 13.5 Chapter 2

  33. Predicting the Effects of Changing Market Conditions • We now have equations for supply and demand Supply: Q = –4.5 + 16P Demand: Q = 13.5 – 8P • Setting them equal will give us equilibrium price and quantity with which we began…..PLEASE VERIFY???? Chapter 2

  34. Price Supply: QS = -4.5 + 16P a/b .75 -c/d Demand: QD = 13.5 - 8P Mmt/yr 7.5 Predicting the Effects of Changing Market Conditions Chapter 2

  35. Predicting the Effects of Changing Market Conditions • Demand could also depend upon other variables such as income • Demand would then be written as: Chapter 2

  36. Predicting the Effects of Changing Market Conditions • We know the following information regarding the copper industry: • I = 1.0 • P* = 0.75 • Q* = 7.5 • b = 8 • Income elasticity: EI= 1.3 Chapter 2

  37. Predicting the Effects of Changing Market Conditions • Using the elasticity of income formula, we can solve for f EI = (I/Q)(Q/I) 1.3 = (1.0/7.5)(f) f = 9.75 • Substituting back into demand equation gives a = 3.75 Chapter 2

  38. Effects of Price Controls • Markets are rarely free of government intervention • Imposed taxes and granted subsidies • Price controls • Price controls usually hold the price above or below the equilibrium price • Excess demand – shortage • Excess supply – surplus Chapter 2

  39. Price S P0 Pmax Shortage D Q0 QD QS Quantity Effects of Price Controls • Price is regulated to be no higher than Pmax • Quantity supplied falls and quantity demanded increases • A shortage results Chapter 2

  40. Effects of Price Controls • Excess demand sometimes takes the form of queues • Sometimes get supply rationing • Producers typically lose, but some consumers gain. Some consumers lose. …………….END OF L2 Chapter 2

More Related