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Chapter 2 su1
 

Chapter 2 su1

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    Chapter 2 su1 Chapter 2 su1 Presentation Transcript

    • Chapter 2 Demand, Supply, & Market Equilibrium
    • Demand
      • Quantity demanded ( Q d )
        • Amount of a good or service consumers are willing & able to purchase during a given period of time
      2-
    • General Demand Function
      • Six variables that influence Q d
        • Price of good or service (P)
        • Incomes of consumers (M)
        • Prices of related goods & services (P R )
      2-
        • Expected future price of product (P e )
        • Number of consumers in market (N)
      • General demand function
    • General Demand Function
      • b, c, d, e, f, & g are slope parameters
        • Measure effect on Q d of changing one of the variables while holding the others constant
      • Sign of parameter shows how variable is related to Q d
        • Positive sign indicates direct relationship
        • Negative sign indicates inverse relationship
      2-
    • General Demand Function
      • Inverse for complements
      2- P P e N M P R Inverse Direct Direct Direct Direct for normal goods Inverse for inferior goods Direct for substitutes b =  Q d /  P is negative c =  Q d /  M is positive c =  Q d /  M is negative d =  Q d /  P R is positive d =  Q d /  P R is negative f =  Q d /  P e is positive g =  Q d /  N is positive Variable Relation to Q d Sign of Slope Parameter e =  Q d /  is positive
    • Direct Demand Function
      • The direct demand function , or simply demand , shows how quantity demanded, Q d , is related to product price, P , when all other variables are held constant
        • Q d = f(P)
      • Law of Demand
        • Q d increases when P falls & Q d decreases when P rises, all else constant
        •  Q d /  P must be negative
      2-
    • Inverse Demand Function
      • Traditionally, price (P) is plotted on the vertical axis & quantity demanded (Q d ) is plotted on the horizontal axis
        • The equation plotted is the inverse demand function, P = f(Q d )
      2-
    • Graphing Demand Curves
      • Change in quantity demanded
        • Occurs when price changes
        • Movement along demand curve
      • Change in demand
        • Occurs when one of the other variables, or determinants of demand , changes
        • Demand curve shifts rightward or leftward
      2-
    • Supply
      • Quantity supplied ( Q s )
        • Amount of a good or service offered for sale during a given period of time
      2-
    • Supply
      • Six variables that influence Q s
        • Price of good or service (P)
        • Input prices (P I )
        • Prices of goods related in production (P r )
        • Technological advances (T)
        • Expected future price of product (P e )
        • Number of firms producing product (F)
      • General supply function
      2-
    • General Supply Function
      • k, l, m, n, r, & s are slope parameters
        • Measure effect on Q s of changing one of the variables while holding the others constant
      • Sign of parameter shows how variable is related to Q s
        • Positive sign indicates direct relationship
        • Negative sign indicates inverse relationship
      2-
    • General Supply Function
      • Direct for complements
      2- P P e F P I P r Direct Direct Direct Inverse Inverse Inverse for substitutes k =  Q s /  P is positive l =  Q s /  P I is negative m =  Q s /  P r is negative m =  Q s /  P r is positive r =  Q s /  P e is negative s =  Q s /  F is positive n =  Q s /  T is positive T Variable Relation to Q s Sign of Slope Parameter
    • Direct Supply Function
      • The direct supply function , or simply supply , shows how quantity supplied, Q s , is related to product price, P , when all other variables are held constant
        • Q s = f(P)
      2-
    • Inverse Supply Function
      • Traditionally, price (P) is plotted on the vertical axis & quantity supplied (Q s ) is plotted on the horizontal axis
        • The equation plotted is the inverse supply function, P = f(Q s )
      2-
    • Graphing Supply Curves
      • Change in quantity supplied
        • Occurs when price changes
        • Movement along supply curve
      • Change in supply
        • Occurs when one of the other variables, or determinants of supply , changes
        • Supply curve shifts rightward or leftward
      2-
    • Market Equilibrium
      • Equilibrium price & quantity are determined by the intersection of demand & supply curves
        • At the point of intersection, Q d = Q s
        • Consumers can purchase all they want & producers can sell all they want at the “market-clearing” or price
      2-
    • Market Equilibrium
      • Excess demand (shortage)
        • Exists when quantity demanded exceeds quantity supplied
      • Excess supply (surplus)
        • Exists when quantity supplied exceeds quantity demanded
      2-
    • Measuring the Value of Market Exchange
      • Consumer surplus
        • Difference between the economic value of a good (its demand price) & the market price the consumer must pay
      • Producer surplus
        • For each unit supplied, difference between market price & the minimum price producers would accept to supply the unit (its supply price)
      • Social surplus
        • Sum of consumer & producer surplus
        • Area below demand & above supply over the relevant range of output
      2-
    • Changes in Market Equilibrium
      • Qualitative forecast
        • Predicts only the direction in which an economic variable will move
      • Quantitative forecast
        • Predicts both the direction and the magnitude of the change in an economic variable
      2-
    • Simultaneous Shifts
      • When demand & supply shift simultaneously
        • Can predict either the direction in which price changes or the direction in which quantity changes, but not both
        • The change in equilibrium price or quantity is said to be indeterminate when the direction of change depends on the relative magnitudes by which demand & supply shift
      2-
    • Ceiling & Floor Prices
      • Ceiling price
        • Maximum price government permits sellers to charge for a good
        • When ceiling price is below equilibrium, a shortage occurs
      • Floor price
        • Minimum price government permits sellers to charge for a good
        • When floor price is above equilibrium, a surplus occurs
      2-