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Chapter 2: Demand, Supply, and Market Equilibrium 2.1 Demand, Supply, and Market Equilibrium A market can be characterized along 3 dimensions Demand Curves a market demand curve is:

[screencast]

Price (in thousands)

[screencast]

Price (in Canadian dollars)

[screencast]

price

quantity

Shifts in Supply and Demand Shifts in *either* curve: Increase in Demand + Unchanged Supply = ___________ price and _________ quantity Decrease in Supply + Unchanged Demand = ___________ price and _________ quantity Decrease in Demand + Unchanged Supply = ___________ price and _________ quantity Increase in Supply + Unchanged Demand = ___________ price and _________ quantity

[screencast]

price

2.2 Price Elasticity of Demand - measures the sensitivity of _______________________ to price Formula:

Interpretation

[screencast]

price

Demand

quantity

Elasticities Along Specific Demand Curves Linear demand curves take the form ______________________. Inverse demand curves refer to: The choke price is

Formula:

Interpretation: Constant Elasticity Demand Curves take the form _________________________. Formula:

Interpretation:

[screencast]

Price Elasticity of Demand and Total Revenue Total Revenue = If demand is inelastic and the price rises, TR will __________. If demand is elastic and the price rises, TR will __________. Determinants of the Price Elasticity of Demand Demand tends to be more price elastic when 1. 2. 3. Market-Level vs Brand-Level Price Elasticities of Demand

2.3 Other Elasticities Income Elasticity of Demand Income elasticity of demand refers to:

Formula:

If income elasticity is positive then ____________________________________. If income elasticity is negative then ____________________________________. Cross-Price Elasticity of Demand Cross-price elasticity of demand refers to:

Formula:

If cross-price elasticity is positive then ____________________________________. If cross-price elasticity is negative then ____________________________________. Price Elasticity of Supply Price elasticity of supply refers to:

Formula:

2.4 Elasticity in the Long Run and the Short Run Greater Elasticity in the Long Run than the Short Run The long-run demand curve is The short-run demand curve is The long-run supply curve is The short-run supply curve is

Greater Elasticity in the Short Run than the Long Run durable goods are

2.5 Back-of-The-Envelope Calculations [screencast] Watch the video for this section and fill in the notes here. To find a specific demand curve: ____________________________________ or ____________________________________ BOTE Calculations Assume demand is ________________: Q = a - bP

We can derive a specific demand curve if we know Well need to find a and b and we can write the demand curve equation. Finding b Recall the formula for elasticity for linear demand:

If we know the elasticity, current price, and current quantity, we can find b. Rearrange the equation to get

Finding a The current price and quantity must be points on the demand curve we are trying to describe. That is: Substitute the expression for b into the demand equation:

Solve for a.

Example: In 1990, US per capita consumption of chicken was 70 pounds per person. The average retail price of chicken was $0.70 per pound. Estimates for the demand elasticity of chicken range from -0.5 to -0.6.

___________________________________ 2.6 Identifying Supply and Demand Curves on the Back of an Envelope We will work through this section together in class.

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