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Supply
DEMAND
Relationship between demand and price
the law of demand
the income effect
the substitution effect
the axes
individual's and market demand curves
(1)
Price
(pence per kg)
(2)
Tracey's
demand
(3)
Darren's
demand
(4)
Total market
demand
(kg)
(kg)
(tonnes: 000s)
20
28
16
700
40
15
11
500
60
350
80
200
100
100
100
20
700
80
60
40
A
20
Demand
0
0
100
200
300
400
500
600
700
800
100
80
20
700
40
500
60
40
A
20
Demand
0
0
100
200
300
400
500
600
700
800
100
80
20
700
B
C
40
60
500
350
60
40
A
20
Demand
0
0
100
200
300
400
500
600
700
800
100
80
60
20
700
B
C
D
40
60
80
500
350
200
40
A
20
Demand
0
0
100
200
300
400
500
600
700
800
Market demand
Point
Price
(pence per kg) (tonnes 000s)
80
60
20
700
B
C
D
E
40
60
80
100
500
350
200
100
40
A
20
Demand
0
0
100
200
300
400
500
600
700
800
DEMAND
Other determinants of demand
tastes
number and price of substitute goods
number and price of complementary
goods
income
distribution of income
expectations
DEMAND
Movements along and shifts in the
demand curve
change in price
movement along D curve
An increase in demand
Price
D0
O
Q0
Q1
Quantity
D1
DEMAND
Demand functions
simple demand functions
Qd = a bP
40
30
20
10
D
0
0
Q (000s)
10
40
Qd (000s)
30
20
10
D
0
0
Q (000s)
10
40
Qd (000s)
5
10
9
8
30
20
10
D
0
0
Q (000s)
10
40
Qd (000s)
5
10
15
9
8
7
30
20
10
D
0
0
Q (000s)
10
40
Qd (000s)
5
10
15
20
9
8
7
6
30
20
10
D
0
0
Q (000s)
10
Supply
SUPPLY
Relationship between supply and price
short-run supply
long-run supply
the axes
individual's and market supply curves
Farmer X's
supply
Total Market
supply
(tonnes)
(tonnes: 000s)
20
50
100
40
70
200
60
100
350
80
120
530
100
130
700
Supply
P
80
20 100
60
40
20
0
0
100
200
300
400
500
600
700
800
Supply
P
80
a
b
20 100
40 200
60
40
20
0
0
100
200
300
400
500
600
700
800
Supply
P
80
a
b
c
60
20 100
40 200
60 350
40
20
0
0
100
200
300
400
500
600
700
800
Supply
d
80
a
b
c
d
60
20
40
60
80
100
200
350
530
40
20
0
0
100
200
300
400
500
600
700
800
Supply
d
80
a 20
b 40
c 60
d 80
e 100
60
40
20
0
0
100
200
300
400
500
600
700
800
100
200
350
530
700
SUPPLY
Relationship between supply and price
short-run supply
long-run supply
the axes
individual's and market supply curves
why supply curves generally slope up
SUPPLY
Other determinants of supply
costs of production
profitability of alternative products
(substitutes in supply)
profitability of goods in joint supply
expectations of producers
SUPPLY
Movements along and shifts in the
supply curve
change in price
movement along S curve
SUPPLY
Supply functions
simple supply functions
Qs = a + bP
non-linear functions
estimated supply equations
problems of estimating supply equations
S0
S1
Increase
S2
Decrease
S0
S1
Increase
surplus (S > D)
price falls
significance of equilibrium
Price of Potatoes
(Tonnes: 000s)
(Tonnes: 000s)
20
700 (A)
100 (a)
40
500 (B)
200 (b)
60
350 (C)
350 (c)
80
200 (D)
530 (d)
100
100 (E)
700 (e)
100
Supply
d
80
Cc
60
40
20
Demand
0
0
100
200
300
400
500
600
700
800
100
Supply
d
80
Cc
60
40
SHORTAGE
(300 000)
a
20
Demand
0
0
100
200
300
400
500
600
700
800
100
Supply
D
80
SURPLUS
(330 000)
Cc
60
40
20
Demand
0
0
100
200
300
400
500
600
700
800
100
Supply
d
80
60
40
20
Demand
0
0
100
200
300
Qe
400
500
600
700
800
Initial equilibrium
at point g
g
Pe1
D1
O
Q e1
g
Pe1
D1
O
Q e1
g
Pe1
D2
D1
O
Q e1
New equilibrium at
point i
Pe2
Pe1
D2
D1
O
Q e1
Q e2
S1
Initial equilibrium
at point g
Pe1
D
O
Q e1
S1
g
Pe1
D
O
Q e1
S2
S1
g
Pe1
D
O
Q e1
S2
S1
k
Pe3
Pe1
New equilibrium at
point k
D
O
Q e3
Q e1
S2
30p
20p
S1
800 1000
S2
30p
20p
S1
Shift in supply
alone.
D
O
800 1000
30p
20p
S2
S1
Shift in both supply
and demand.
a
D2
D1
800 1000
Elasticity
ELASTICITY
Defining elasticity
the responsiveness of demand and supply
Price
S1
a
P1
D
O
Q1
Quantity
Price
b
P2
a
P1
D
O
Q2
Q1
Quantity
Price
b
P2
c
P3
a
D'
P1
D
O
Q3
Q2
Q1
Quantity
ELASTICITY
Price elasticity of demand
measurement
proportionate (or %) Qd / proportionate (or %) P
ELASTICITY
Determinants of price elasticity of
demand
number and closeness of substitute goods
Total expenditure
4
P() 2
0
0
ELASTICITY
Price elasticity of demand and
consumer expenditure (P x Q)
effects of a price change on expenditure:
elastic demand
b
a
10
20
ELASTICITY
Price elasticity of demand and
consumer expenditure (P x Q)
effects of a price change on expenditure:
elastic demand
effects of a price change on expenditure:
inelastic demand
P()
D
0
15
20
ELASTICITY
Price elasticity of demand and
consumer expenditure (P x Q)
effects of a price change on expenditure:
elastic demand
effects of a price change on expenditure:
inelastic demand
special cases
P2
P1
Q1
b
D
P1
Q1
Q2
20
b
8
40
100
ELASTICITY
Price elasticity of demand and
consumer expenditure (P x Q)
effects of a price change on expenditure:
elastic demand
effects of a price change on expenditure:
inelastic demand
special cases
Expenditure falls
as price rises
P()
b
a
10
20
P()
D
0
15
20
ELASTICITY
Price elasticity of demand and
consumer expenditure (P x Q)
effects of a price change on expenditure:
elastic demand
effects of a price change on expenditure:
inelastic demand
special cases
applications to price decisions
different elasticities along a demand curve
a
P1
Q1
a
P1
Elastic
demand
b
P2
Q1
Q2
a
P1
b
P2
Inelastic
demand
c
P3
Q1
Q2
Q3
ELASTICITY
Measurement of elasticity: arc
elasticity
the formula for price elasticity of demand
Q/Q P/P
m
8
n
6
P ()
4
Demand
0
0
10
20
30
Q (000s)
40
50
Ped =
Q
mid Q
mid P
P = 2
P ()
Q = 10
Mid P
4
Demand
0
0
10
15
Mid Q
20
30
Q (000s)
40
50
Ped =
m
8
P = 2
mid Q
10
15
mid P
-2
7
P ()
Q = 10
Mid P
4
Demand
0
0
10
15
Mid Q
20
30
Q (000s)
40
50
Ped =
m
8
P = 2
P ()
Q
mid Q
mid P
10
-2
15
7
10/15 x -7/2
Q = 10
Mid P
4
Demand
0
0
10
15
Mid Q
20
30
Q (000s)
40
50
Ped =
m
8
P = 2
P ()
=
=
Q
mid Q
mid P
10
-2
15
7
10/15 x -7/2
-70/30
Q = 10
Mid P
4
Demand
0
0
10
15
Mid Q
20
30
Q (000s)
40
50
Ped =
m
8
P = 2
P ()
Q = 10
Mid P
=
=
=
Q
mid Q
mid P
10
-2
15
7
10/15 x -7/2
-70/30
-7/3 = -2.33
Demand
0
0
10
15
Mid Q
20
30
Q (000s)
40
50
ELASTICITY
Measurement of elasticity: point
elasticity
the formula for price elasticity of demand
dQ/dP x P/Q
r
P
0
Q
r
30
P
100
40
Q
r
30
P
100
40
Q
r
30
P
100
40
Q
r
30
P
100
40
Q
ELASTICITY
Measurement of elasticity: point
elasticity
the formula for price elasticity of demand
dQ/dP x P/Q
n
8
m
6
l
4
Demand
k
0
0
10
20
30
40
50
(1 / slope) is constant
= -50/10 = -5
m
6
l
4
Demand
k
0
0
10
20
30
40
50
(1 / slope) is constant
= -50/10 = -5
at n, P/Q = 8/10
l
4
Demand
k
0
0
10
20
30
40
50
(1 / slope) is constant
= -50/10 = -5
at n, P/Q = 8/10
at m, P/Q = 6/20
atl l, P/Q = 4/30
P
4
Demand
k
0
0
10
20
30
40
50
ELASTICITY
Price elasticity of supply
measurement
QS/QS P/P
determinants
the amount that costs rise as output rises
time period
P1
D1
O
Q1
P1
D2
D1
O
Q1
P2
Si
b
P1
D2
D1
O
Q1
P2
Si
SS
b
c
P3
P1
D2
D1
O
Q1
Q3
P2
Si
SS
b
c
P3
P4
SL
d
P1
D2
D1
O
Q1
Q3 Q4
ELASTICITY
Price elasticity of supply
measurement
QS/QS P/P
determinants
the amount that costs rise as output rises
time period
applications
ELASTICITY
Income elasticity of demand
measurement
QS/QS P/P
determinants
degree of necessity
proportion of income spent on the good
applications
The Time
Dimension
P1
D1
O
Q1
P1
D2
D1
O
Q1
S short-run
b
P2
P1
D2
D1
O
Q1
Q2
S short-run
S long-run
b
P2
P3
P1
c
Supply is more elastic
in the long run.
D2
D1
O
Q1
Q2 Q3
S1
a
P1
Q1
S1
S2
a
P1
Q1
S1
S2
a
P1
P2
D short-run
Q1
Q2
S1
S2
a
P1
P3
P2
Demand is more
elastic in the long run.
D long-run
D short-run
Q1
Q2 Q3
Speculation
Speculation
stabilising speculation
S1
P1
P2
Speculators
believe that the fall
in price to P2 is
only temporary.
D1
b
D2
S2
S1
P1
a
c
P3
P2
D1
b
D2
Speculators
believe that the fall
in price to P2 is
only temporary.
D3
Q
S1
P2
P1
Speculators
believe that the
rise in price to P2
is only temporary.
D2
D1
O
S1
S2
P2
P3
P1
Speculators
believe that the
rise in price to P2
is only temporary.
D2
D1
O
D3
Q
Speculation
stabilising speculation
destabilising speculation
S1
P1
P2
a
b
Speculators
believe that the fall
in price to P2
signifies a trend.
D1
D2
O
S1
S2
P1
P2
P3
Speculators
believe that the fall
in price to P2
signifies a trend.
D1
D3
O
D2
S1
P2
P1
Speculators
believe that the
rise in price to P2
signifies a trend.
D1
O
D2
S2
S1
P3
P2
P1
Speculators
believe that the
rise in price to P2
signifies a trend.
D3
D1
O
D2
Speculation
stabilising speculation
destabilising speculation
Speculation
stabilising speculation
destabilising speculation
Speculation
stabilising speculation
destabilising speculation
Speculation
stabilising speculation
destabilising speculation