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# Chapter 2 su1

## on Jan 27, 2011

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## Chapter 2 su1Presentation 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
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 )
• 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
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-