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Chapter 2 Review of S and D

Chapter 2 Review of S and D. Supply Curve : Shows quantity supplied at each possible price, ceteris paribus (c.p.). Slopes upward (positive relationship) Qs = Qs(P) Shift S Curve: Clarify movement along vs shift. C.P. factors: Interpret shift S curve:. Demand Curve.

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Chapter 2 Review of S and D

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  1. Chapter 2Review of S and D • Supply Curve: • Shows quantity supplied at each possible price, ceteris paribus (c.p.). • Slopes upward (positive relationship) • Qs = Qs(P) • Shift S Curve: • Clarify movement along vs shift. • C.P. factors: • Interpret shift S curve:

  2. Demand Curve • Shows quantity demanded at each possible price, ceteris paribus (c.p.) • Slopes downward (negative relationship) • Qd = Qd(P) • Movement along versus shift. • C.P. factors: • Interpret shift D curve:

  3. Market Mechanism • Put Supply and Demand Together • Equilibrium • 1. • 2. • Describe re-equilibrating process by changing C.P. factor: • Increase in income causes increase in demand (shift D rightward) • At old P, Qd greater than Qs: so individuals bid up price till reach new equilibrium.

  4. Elasticity • Definition: %Qd in response to a 1% P • Or: %Qd / %P • What is %? Absolute change in variable divided by original level of variable. • Ep = (Qd/Q) / (P/P) • = (P/Q) (Q/P) • Remember: (Q/P) is 1/slope. • Ep = price elasticity of demand; usually negative.

  5. More About Elasticities • Elastic: Ep 1 • Inelastic: Ep 1 • Unitary Elastic: Ep 1 • Fact: While slope is constant along a linear demand curve, elasticity is not. • Fact: At top of demand curve, when P is high and Q is low, Ep is big negative number so D curve is very elastic. • Fact: As move down D curve to right, Ep falls (because P is  while Q is , so P/Q is ).

  6. Example • Price Demand Supply • 60 22 14 • 80 20 16 • 100 18 18 • 120 16 20 • 1. What is P*, Q*? • 2. When P=$80, what is ED?

  7. Relative Elasticities • Rule: the steeper the slope of the curve, the less elastic. • Completely horizontal demand curve: infinitely elastic: • So: • Completely vertical demand curve: completely inelastic: • So:

  8. Nearly Horizontal Demand Curve • Elasticity approaches infinity: Recall: 1/slope = Q/P • If nearly flat curve: small  P causes a huge Q. This is same as: huge  / small  , which equals a very big number.

  9. Income Elasticity of Demand • Measure responsiveness of Qd to change in income (note this is a ceteris paribus factor). • EI = %in Qd resulting from a 1%  in income. • EI = (Q/Q) / (I/I) • = I/Q  (Q/I).

  10. Cross-Price Elasticity of Demand • Measures responsiveness in Qd of one good to change in price of a related good (note this is a change in a c.p. factor). • Cross-price elasticity of demand = % in Qd resulting from a 1%  in the price of a related good. • EQ1P2 = (Q1/Q1) / (P2/P2) •  P2/Q1  Q1/P2. • EQP  0: the two goods are substitutes. • EQP  0: the two goods are complements.

  11. Price Elasticity of Supply • Price Elasticity of Supply: Responsiveness of Qs to P. • ESP = %Qs / %P • = (Qs/Qs) / (P/P) •  P/Qs  Qs/P • Usually positive.

  12. Wage Elasticity of Supply • Measures responsiveness of Qs to changes in the cost of labor (a ceteris paribus factor). • ESW = %Qs / %W • = (Qs/Qs) / (W/W) •  W/Qs  Qs/W. • Usually negative. • Remember: W   cost of production.

  13. Short-Run versus Long-run Elasticities • Focal point: how much time do sellers and consumers have to respond (in their Qs and Qd) to changes in price? • In general: LR adjustment is more full, free adjustment so that LR elasticity is larger; BUT not true all the time. • Key factors: • Durability. • Availability of substitutes

  14. Government Price Controls • Key: If government sets P so that there is no single P for which Qs=Qd, then there will be a shortage or surplus. • Be able to show the Qs and Qd for any price. • Price ceiling: • Price floor:

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