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Chapter 2 Supply and Demand

This document provides an overview of supply and demand concepts. It defines demand as the quantity consumers are willing to buy at a given price, and supply as the quantity firms are willing to sell. Market equilibrium occurs when quantity demanded equals quantity supplied at the equilibrium price. The interaction of supply and demand curves can be used to analyze how the market responds to various shocks. Demand depends on price, income, and prices of substitutes and complements. Supply depends on production costs and prices of inputs. Elasticities measure responsiveness of quantity to price changes. Comparative statics analyzes how equilibrium price and quantity change with shifts in supply and demand. Price controls like price floors and ceilings can cause surpluses or shortages

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134 views4 pages

Chapter 2 Supply and Demand

This document provides an overview of supply and demand concepts. It defines demand as the quantity consumers are willing to buy at a given price, and supply as the quantity firms are willing to sell. Market equilibrium occurs when quantity demanded equals quantity supplied at the equilibrium price. The interaction of supply and demand curves can be used to analyze how the market responds to various shocks. Demand depends on price, income, and prices of substitutes and complements. Supply depends on production costs and prices of inputs. Elasticities measure responsiveness of quantity to price changes. Comparative statics analyzes how equilibrium price and quantity change with shifts in supply and demand. Price controls like price floors and ceilings can cause surpluses or shortages

Uploaded by

Janny Xu
Copyright
© © All Rights Reserved
We take content rights seriously. If you suspect this is your content, claim it here.
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Download as DOCX, PDF, TXT or read online on Scribd
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Chapter 2: Supply and Demand

Before using the Supply and Demand Model, determine


1. Buyers behavior
2. Sellers behavior
3. Their interactions
Demand: the quantity of a good or service that consumers demand depends on price and other
factors such as consumers income and the prices of related goods.
Supply: the quantity of a good or service that firms supply depends on price and other factors
such as the cost of inputs that firms use to produce the goods or service.
Market Equilibrium: the interaction between consumers demand curve and firms supply
curve determines the market price and quantity of a good or service that is bought and sold.
Shocking the Equilibrium: Comparative Statics. changes in a factor that affect demand (such
as consumers income), supply (such as a rise in the price of inputs) or a new govnt policy (syc
as a new tax) , alter the market or equilibrium price and quantity of a good.
Elasticities: Given estimates of summary statistics called elasticities, economists can forecast the
effects of changes in taxes and other factors on market price and quantity.
Effects of a Sales Tax: how a sales tax increase affects the price and quantity of a good, and
whether the tax falls more heavily on consumers or on suppliers, depend on the supply and
demand curves.
Quantity supplied Need not Equal Quantity Demanded: if the government regulates the price
in market, the quantity supplied might not equal the quantity demanded.
When to Use the Supply-and-Demand Model: The supply-and-demand model applies to
competitive markets only.
2.1 Demand
Quantity demanded: the amount of a good that consumers are willing to buy at a given price
during specified period, holding constant the other factors that influence purchases.
Factors that influence Consumers purchase
1. Information and misinformation
2. Prices of other goods (substitutes & complements)
3. Peoples income
4. Govt rules and regulations
The Demand Function: describes the mathematical relationship between quantity demanded
(Qd), price (p) and other factors that influence purchases:
Q=D( p , ps , p c Y )
p = per unit price of the food or service

ps = per unit price of a substitute good

pc = per unit price of a complementary good

Y = consumers income
- Changes in the price of the goods causes movement along the demand curve

Law of Demand: consumers demand more of a good the lower its price, holding
others factors constant. Derivative is negative higher price results in lower
quantity demanded.
- the derivative of the demand function with respect to price shows the movements along the
demand curve
Q=17120 p+20 pb +3 pc +2 Y
Qd =quantity of pork demanded
p= price of pork
pb= price of beef [$4]
pc = price of chicken [$3.33]
Y =consumers ' income [$12.5]
( Q/ p)=20
Derivative =
Slope = 1/( Q/ p)=(1/2)0=0.05
- Changes in price causes movement along the curve
- Changes in any other factors, causes shift of the demand curve.
Quantity supplied: the amount of good that firms want to sell during a given period at a given
price, holding other factor constant.
Factors that influence the Supply function
1. Production cost
2. Government rules and regulations
Supply function: the relationship between quantity supplied, price, and other factors that
influence the number of units offered for sale.
-There is NO law of supply, the curve can be upwards, vertical, horizontal, or upward/downward
sloping.
Equilibrium: situation in which no participant wants to change its behavior.
Equilibrium price (Market clearing price): consumers want to buy the same quantity that
firms want to sell.
Equilibrium quantity: quantity that is bought and sold at the equilibrium price.
Comparative statistics: the method economists use to analyze how variable controlled by
consumers, and firms, price and quantity react to a change in environmental variables
(exogenous variables).
- Includes prices of:
- Substitutes
- Complement
- Consumer income level
- Price of inputs
Comparative Statistics with Small Changes
Demand Function: Q = D(p)
Supply Function: Q = S(p, a)
a environmental variable.

Demand Elasticity
Price elasticity of demand:

Percentage change in quantity demanded


Percentage change in price
Elasticity along the Demand Curve
- The higher the price the more negative the elasticity of the demand.
= 0 perfectly inelastic (eg. vertical demand curve)
- -1 < < 0 inelastic
< -1 elastic
Income Elasticity: percentage change in quantity demanded in response to % change in income.

= % change in quantity demanded =


% change in income
Cross price elasticity: percentage change in the quantity demanded in response to a given
percentage change in the price of another good.
= % change in quantity demanded =
% change in price of another good
- CPE = (-) good is complements
- CPE = (+) good is substitutes
Supply Elasticity
% change in quantity supplied in response in response to a given percentage change in price.
= % change in quantity supplied =
% change in price

= supply curve slopes downwards


+
= supply curve slopes upwards
- Vertical supply curve perfectly inelastic =0
- Horizontal supply curve perfectly elastic =
0<<1 inelastic
Effects of Sales tax
- How much a tax affects the equilibrium price and quantity and how much tax fall
on consumers depends on the elasticities of demand and supply.
- 2 different taxes:
- Sales tax
- Unit tax (gasoline)
Price ceiling: legally limits the amount that can be charged for a product.
- Causes excess in demand leading to shortage
- (eg. Oil price on gasoline, charged less than what it really was thus supplying less
but higher demand)

Price Floor: legally impose a price control that limits how low a price is charged on a product.
- Causes an excess supply or persistent surplus
- (eg. Minimum wage on employees forced employers to lay off worker resulting in
high unemployment)

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