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Qs Qs (P)
Chapter 2: The Basics of Supply and Demand Slide 1
Supply and Demand
The
TheSupply
Supply
Price
Curve
CurveGraphically
Graphically
($ per unit) S
P2
The supply curve slopes
P1 upward demonstrating that
at higher prices, firms
will increase output
Q1 Q2 Quantity
At P2, produce Q1 P1
Supply curve shifts right
to S’ P2
More produced at any
price on S’ than on S
Q0 Q1 Q2 Q
QD QD(P)
Chapter 2: The Basics of Supply and Demand Slide 4
Supply and Demand
Price
($ per unit) The demand curve slopes
downward demonstrating
that consumers are willing
to buy more at a lower price
Quantity
Chapter 2: The Basics of Supply and Demand Slide 5
Supply and Demand
Change
Changein
inDemand
Demand
P D D’
Income Increases
At P1, purchase Q2 P2
At P2, purchase Q1
Q0 Q1 Q2 Q
Chapter 2: The Basics of Supply and Demand Slide 6
The Market Mechanism
Price
($ per unit) S
Q0 Quantity
Q1 Q3 Q2 Quantity
Chapter 2: The Basics of Supply and Demand Slide 8
The Market Mechanism
Price
($ per unit) S
Q1 Q3 Q2 Quantity
Chapter 2: The Basics of Supply and Demand Slide 9
Changes In Market Equilibrium
P
Income Increases & D D’ S S’
raw material prices fall
The increase in D is
greater than the P2
increase in S P1
Q1 Q2 Q
Chapter 2: The Basics of Supply and Demand Slide 10
Example 1: Market for Eggs
Prices fell until
P S1970 a new equilibrium
(1970 was reached at $0.26
dollars per and a quantity
dozen) of 5,300 million dozen
S1998
$0.61
$0.26
D1970
D1998
5,300 5,500 Q (million dozens)
Chapter 2: The Basics of Supply and Demand Slide 11
Example 2: Market for a College Education
$2,530
D1995
D1970
7.4 12.3 Q (millions of students enrolled))
Chapter 2: The Basics of Supply and Demand Slide 12
Elasticities of Supply and Demand
Price
PriceElasticity
Elasticityof
ofDemand
Demand
EP (%Q)/(%P)
Chapter 2: The Basics of Supply and Demand Slide 13
Elasticities of Supply and Demand
Price
PriceElasticity
Elasticityof
ofDemand
Demand
Q/Q P Q
EP
P/P Q P
Price
EP - The lower portion of
4 a downward sloping
demand curve is less elastic
Q = 8 - 2P than the upper portion.
Ep = -1
2
Linear Demand Curve
Q = a - bP
Q = 8 - 2P
Ep = 0
4 8 Q
Q/Q I Q
EI
I/I Q I
Qb/Qb Pm Qb
E QbPm
Pm/Pm Qb Pm
Price
Price Elasticity
Elasticityof
of Demand
Demand
Price elasticity of demand varies with the amount of
time consumers have to respond to a price.
Most goods and services:
Short-run elasticity is less than long-run elasticity (e.g.
gasoline). People tend to drive smaller and more fuel efficient
cars in the long-run
Other Goods (durables):
Short-run elasticity is greater than long-run elasticity (e.g.
automobiles). People may put off immediate consumption, but
eventually older cars must be replaced.
P0
Short-Run
1) Supply is completely inelastic
2) Demand is relatively inelastic
3) Very large change in price
Q1 Q0 Quantity
Price
Supply: Q = c + dP
a/b
ED = -bP*/Q*
P* ES = dP*/Q*
-c/d Demand: Q = a - bP
Q* Quantity
Demand: QD = a - bP
Supply: QS = c + dP
ED - b(P * /Q*)
ES d(P * /Q*)
Chapter 2: The Basics of Supply and Demand Slide 27
Understanding and Predicting the Effects
of Changing Market Conditions
Price
Supply: QS = -4.5 + 16P
1.69 = a/b
.75
7.5 Mmt/yr
Q = -4.5 + 16P
The new equilibrium price is:
If price is regulated to
be no higher than Pmax,
quantity supplied falls
P0 to Q1 and quantity
demanded increases to
Q2. A shortage results.
Pmax
D
Excess demand
Q1 Q0 Q2 Quantity
Chapter 2: The Basics of Supply and Demand Slide 35
Price Controls and
Natural Gas Shortages
The
TheData:
Data:Natural
NaturalGas
Gas
At $1.00/TcF
QS 18 TcF and Q 25 TcF
Shortage 7 TcF/yr