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READING & VIDEO OUTLINE

Intermediate Microeconomics Dr. Sauer

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:

derived demand refers to:

direct demand refers to:

The Law of Demand says:

Work through the LBD exercise 2.1 here:

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Price (in thousands)

Quantity (in millions)

Supply Curves a market supply curve is:

The Law of Supply says:

Factors of Production are:

Work through the LBD exercise 2.2 here:

[screencast]
Price (in Canadian dollars)

Quantity (in billions)

Market Equilibrium Equilibrium is:

Work through the LBD exercise 2.3 here:

[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

Work through the LBD exercise 2.4 here:

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price

quantity (in millions)

Shifts in *both* curves:

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

Value =0 -1 < < 0 = -1 - < < -1 = -

Rules for Evaluating Classification

Interpretation

Work through the LBD exercise 2.5 here:

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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:

Work through the LBD exercise 2.6 here:

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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.

If we know the elasticity and current quantity we can find 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.

The equation describing the demand for chicken in 1990 is:

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

2.7 Identifying the Price Elasticity of Demand from Shifts in Supply