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BASIC CONCEPTS:
DEMAND, SUPPLY,
AND
EQUILIBRIUM
DEMAND
Market Demand Curve
Q d f ( P P O , M , P O P , SP P D )
Change in Demand
(Shift in the Position of the Demand Curve)
Well, it depends!
$3
This is because butter is, in
general, complementary to
bread. Qbutter
20 30
Demand Shifter: Money Income (M)
How about an increase in income?
Again, it depends!
P
This is consistent with the
idea that as income increases
people buy more of the
products.
$3
In this case, the good is
called a normal good.
Qd
20 30
A few commodities such as dry beans and potato
are called inferior goods.
Qd 5%
0.5%
% in Qd Qd Qd P
% in P P P Qd
10% 1%
P
A convenient way to think of an own-price elasticity of
demand is as the percentage change in quantity demanded
corresponding to a one percentage change in own price,
holding other factors constant.
% in Qd
% in Q d associated with 1% in P
% in p
30% in Qd
6% in Q d associated with 1% in P
5% in p
Own-Price Elastic VS.
Inelastic
Qd
Qd Qd P
*
P P Qd
P 1
1 P slope
* 0
Slope of the demand curve Qd
Hence
The flatter the demand curve, the more price elastic
is the demand.
P P
flatter steeper
Qd Qd
Qd Qd
The flatter the demand curve, the more price elastic is the demand.
Qd P 1 P
* *
P Qd Slope of the demand curve Qd
Along the curve, the slope stays the same, but P and
Qd change as we move along the demand curve.
Write down the formula for own price elasticity of demand for beef.
Qs f ( P , PI , PO, CAP )
Supply Curve
Qs f ( P PI , PO , CAP )
Change in Quantity Supplied
(Movement Along a Supply Curve)
P
Supply Curve
Notice that the supply
curve has a positive
P"
slope. P
P'
slope of supply curve
P Qs Qs
0 Qs '
Q "
Qs s
P
An improvement in
technology is defined as
something that enables firms
to produce more output with
the same quantity of inputs as $3
previously.
1 P Qs
P
slope of supply curve Qs
Supply Curve
0 Qs
% in Q s Qs P
Q s, P
% in P P Qs
1 P
slope of supply curve Qs
Notice that the flatter the supply curve, the larger is Qs, p
(that is, the more price elastic is the supply).
Hence
The flatter the supply curve, the more price elastic
is the supply.
P P
steeper
flatter
Qs Qs
Qd Qd
The flatter the supply curve, the more price elastic is the supply.
Own Price Elastic VS.
Inelastic
Write down the formula for own price elasticity of supply of beef.
P*
In a perfectly competitive
Demand
market, prices other than the
equilibrium price cannot be Qd, Qs
Q*
sustained.
Some or all producers will
At prices above the equilibrium begin to offer their products at
price, we have a situation called a lower price.
excess supply.
The lower price discourages
This is because the quantity some supply and encourages
that consumers are willing to additional demand.
buy is less than the quantity
producers are willing to sell. The process continues until
price is driven down to P*, at
which point Qd = Qs.
P
Supply
Disequilibrium
P*
On the other hand, at prices P' excess demand Demand
below the equilibrium price, we
have a situation called excess Qd, Qs
Q*
demand.
The higher price discourages
This is because the quantity some demand and encourages
that consumers are willing to additional supply.
buy is more than the quantity
producers are willing to sell. The process continues until
price is driven driven to P*, at
which point Qd = Qs.
In this case, consumers
will begin bidding up the
Accordingly, only the equilibrium
price.
price can be sustained.
In-Class Exercise 1-c (i)
Consider the following demand equation for beef products:
Qdbeef 001
. 05
. Pbeef 003
. Ppork 001
. Pchicken 004
. M 001
. SPPD
T
h
ed
e
ma
nd
e
qu
at
i
onc
a
nb
ew
r
it
t
ena
s
:What would
d happen to the
Q
b
e
e3
.
f5
0 0
.
5Pb
e
ef demand
equation if
there is an
T
h
esup
p
lye
q
ua
ti
oncan
be
wr
i
tt
ena
s
: increase in
s consumer
Q
b
e
ef
1
.
400.
2Pb
e
ef income?
In-Class Exercise 1-c (iii)
T
hed
ema
nde
qua
ti
oni
s:T
hes
upp
lye
qua
tio
nis
:
d
Q
b
ef
e 3.
500
.
5Pb
ee
f
s
Q
be
ef
1.4
00
.P
2b
ee
f
P
Supply
P*
Demand
Qd, Qs
Q*
Pbeef = 3
T
hed
ema
nde
qua
ti
oni
s:
d
Q
b
ef
e 3.
500
.
5Pb
ee
f
T
hes
upp
lye
qua
ti
oni
s:
s
Q
be
ef
1.
400
.P
2b
ee
f
T
hed
ema
nde
qua
ti
oni
s: P
d
Q
b
ef
e 3.
500
.
5Pb
ee
f
7
(P,Q) = (0, 3.5)
(P,Q) = (7, 0)
1.4 3.5
Q
T
hes
upp
lye
qua
ti
oni
s:
s
Q
be
ef
1.
400
.P
2b
ee
f
(P,Q) = (-7, 0)
END OF
LECTURE 1