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  • Answer: What happens to the quantity supplied if the price of processed pork increases by Δ p = p 2− p 1? Using the same approach as before, we learn from Equation 2.7 that Δ Q = 40Δ p .8 A $1 increase in price (Δ p = 1) causes the quantity supplied to increase by Δ Q = 40 million kg per year. This change in the quantity of pork supplied as p increases is a movement along the supply curve .
  • Problem # 27 of the end of chapter problems

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  • 1. Chapter TwoSupply and Demand
  • 2. Chapter Outline1. Demand.2. Supply.3. Market Equilibrium.4. Shocking the Equilibrium.5. Effects of Government Interventions.6. When to Use the Supply-and- Demand Model.© 2009 Pearson Addison-Wesley. All rights reserved.
  • 3. Demand: determinants of demand. The following factors determine the demand for a good:  Price of the good  Tastes  Information  Prices of related goods  Complements and substitutes  Income  Government rules and regulations  Other© 2009 Pearson Addison-Wesley. All rights reserved.
  • 4. Demand: the demand curve Quantity demanded - the amount of a good that consumers are willing to buy at a given price, holding constant the other factors that influence purchases. Demand curve - the quantity demanded at each possible price, holding constant the other factors that influence purchases© 2009 Pearson Addison-Wesley. All rights reserved.
  • 5. Figure 2.1 A Demand Curve Law of Demand consumers demandp, $ per kg 14.30 more of a good the Demand curve for pork, D1 lower its price, holding constant all other factors that influence consumption 4.30 3.30 2.30 0 200 220 240 286 Q, Million kg of pork per year © 2009 Pearson Addison- Wesley. All rights reserved.
  • 6. Figure 2.2 A Shift of theDemand Curve p, $ per kg Effect of a 60¢ increase in the price of beef3.30 D2 D1© 0 176 2009 Pearson Addison- 220 232Wesley. All rights reserved. Q, Million kg of pork per year
  • 7. The Demand Function The processed pork demand function is: Q = D(p, pb, pc, Y)  where Q is the quantity of pork demanded  p is the price of pork (dollars per kg)  pb is the price of beef (dollars per kg)  pc is the price of chicken (dollars per kg)  Y is the income of consumers (thousand© 2009 Pearson Addison- dollars)Wesley. All rights reserved.
  • 8. From the Demand Function to theDemand Curve Estimated demand function for pork: Q = 171−20p + 20pb + 3pc + 2Y Using the values pb = 4, pc = 3.33 and Y = 12.5, we have Q = 286−20p  which is the linear demand function for pork.© 2009 Pearson Addison-Wesley. All rights reserved.
  • 9. From the Demand Function to theDemand Curve Q = 286− 20pp, $ per kg In general,$3.30 IfIfpp= = 0, then by 14.30 If p increases If p decreases 1 D then, $4.30) $1 (to Demand curve for pork, Q = -20∆p$1 (to ∆ Qby 286 = then, Q =$2.30) then, 220 = slope ∆p Q = 200 Q = 240 4.30 3.30 2.30 0 200 220 240 286 Q, Million kg of pork per year© 2009 Pearson Addison-Wesley. All rights reserved.
  • 10. Solved Problem 2.1 How much would the price have to fall for consumers to be willing to buy 1 million more kg of pork per year?© 2009 Pearson Addison-Wesley. All rights reserved. 2-
  • 11. Solved Problem 2.1: Answer1. Express the price that consumers are willing to pay as a function of quantity. Q = 286−20p 20p = 286 - Q p = 14.30 − 0.05Q© 2009 Pearson Addison-Wesley. All rights reserved. 2-
  • 12. Solved Problem 2.1: Answer2. Use the inverse demand curve to determine how much the price must change for consumers to buy 1 million more kg of pork per year. Δp = p2 − p1 = (14.30 − 0.05Q2) − (14.30 − 0.05Q1) = –0.05(Q2 − Q1) = –0.05ΔQ.  The change in quantity is ΔQ = Q2 − Q1 = (Q1 + 1)−Q1 = 1, so the change in price is Δp = –0.05.© 2009 Pearson Addison-Wesley. All rights reserved. 2-
  • 13. Application: Aggregating theDemand for Broadband Service© 2009 Pearson Addison-Wesley. All rights reserved. 2-
  • 14. Supply: determinants of supply. The following factors determine the supply for a good:  Price of the good  Costs  Government rules and regulations© 2009 Pearson Addison-Wesley. All rights reserved. 2-
  • 15. Supply: the demand curve Quantity supplied - the amount of a good that firms want to sell at a given price, holding constant other factors that influence firms’ supply decisions, such as costs and government actions Supply curve - the quantity supplied at each possible price, holding constant the other factors that influence firms’ supply decisions© 2009 Pearson Addison-Wesley. All rights reserved. 2-
  • 16. Figure 2.3 A Supply Curve An increase in the price…p, $ per kg 5.30 Supply curve, S 1 3.30 causes a movement along the curve…. 0 176 220 300 and a decrease in the Q, Million kg of po per year rk © 2009 Pearson Addison- quantity supplied…. Wesley. All rights reserved. 2-
  • 17. Figure 2.4 A Shift of a SupplyCurve p, $ per kg A $0.25 increase in the price of hogs….. shifts the supply curve to the left S2 S1 3.30 reducing the quantity supplied at the previous price. 0 176 205 220© 2009 Pearson Addison- Q, Million kg of po rk per yearWesley. All rights reserved. 2-
  • 18. The Supply Function The processed pork supply function is: Q = S(p, ph)  where Q is the quantity of pork supplied  p is the price of pork (dollars per kg)  ph is the price of a hog (dollars per kg)© 2009 Pearson Addison-Wesley. All rights reserved. 2-
  • 19. From the Supply Function to theSupply Curve Estimated demand function for pork: Q = 178 + 40p−60ph Using the values ph = $1.50 per kg Q = 88 + 40p. What happens to the quantity supplied if the price of processed pork increases by Δp = p2−p1?© 2009 Pearson Addison-Wesley. All rights reserved. 2-
  • 20. Figure 2.5 Total Supply: The Sumof Domestic and Foreign Supply© 2009 Pearson Addison-Wesley. All rights reserved. 2-
  • 21. Solved Problem 2.2 How does a quota set by the United States on foreign steel imports of Q affect the total American supply curve for steel given the domestic supply, Sd in panel a of the graph, and foreign supply, Sf in panel b?© 2009 Pearson Addison-Wesley. All rights reserved. 2-
  • 22. Solved Problem 2.2© 2009 Pearson Addison-Wesley. All rights reserved. 2-
  • 23. Market Equilibrium Equilibrium - a situation in which no one wants to change his or her behavior.  excess demand the amount by which the quantity demanded exceeds the quantity supplied at a specified price.  excess supply the amount by which the quantity supplied is greater than the quantity demanded at a specified price© 2009 Pearson Addison-Wesley. All rights reserved. 2-
  • 24. Figure 2.6 Market Equilibrium At a price above equilibrium….p, $ per kg Excess supply = 39 Market equilibrium point! S 3.95 e 3.30 2.65 Excess demand = 39At a price below Dequilibrium…. is below the quantity is below the quantity supplied demanded 0 176 194 207 220 233 246© 2009 the quantity demanded…. Pearson Addison- Q, Million kg of pork per yearthe quantity supplied….Wesley. All rights reserved. 2-
  • 25. Using Math to Determine theEquilibrium Demand: Qd = 286 − 20p Supply: Qs = 88 + 40p Equilibrium: Qd = Qs 286 − 20p = 88 + 40p 60p = 198 P = $3.30 Q = 286 – 20(3.3) = 220© 2009 Pearson Addison-Wesley. All rights reserved. 2-
  • 26. Equilibrium: Practice Problem The demand function for a good is Q = a−bp, and the supply function is Q = c + ep, where a, b, c, and e are positive constants. Solve for the equilibrium price and quantity in terms of these four constants.© 2009 Pearson Addison-Wesley. All rights reserved. 2-
  • 27. Shocking the Equilibrium The equilibrium changes only if a shockoccurs that shifts the demand curve or thesupply curve. These curves shift if one of the variables we were holding constant changes.© 2009 Pearson Addison-Wesley. All rights reserved. 2-
  • 28. Figure 2.7a Equilibrium Effects of aShift of a Demand Curve A $0.60 increase in the price of beef shifts the demand outward p, $ per kg Which puts an upward pressure in the price to a new e2 equilibrium. S 3.50 3.30 D2 e1 D1 At the original price Excess demand = 12 there is now an excess demand…. 0 176 220 228 232© 2009 Pearson Addison-Wesley. All rights reserved. Q, Million kg of pork per year 2-
  • 29. Figure 2.7b Equilibrium Effects ofa Shift of a Supply Curve A $0.25 increase in the price of hogs shifts the supply curve to the left p , $ per kg Which puts an upward pressure in the price to a new equilibrium. S2 e2 3.55 S1 3.30 e1 D At the original price Excess demand = 15 there is now an excess demand…. 0 176 205 215 220© 2009 Pearson Addison- Q, Million kg of pork per yearWesley. All rights reserved. 2-
  • 30. Solved Problem 2.3 Mathematically, how does the equilibrium price of pork vary as the price of hogs changes if the variables that affect demand are held constant at their typical values?© 2009 Pearson Addison-Wesley. All rights reserved. 2-
  • 31. Solved Problem 2.3: Solution1. Solve for the equilibrium price of pork in terms of the price of hogs. Qd = 286−20p Qs = 178 + 40p−60ph 286−20p = 178 + 40p−60ph 60p = 108 – 60ph p = 1.8 – ph2. Show how the equilibrium price of pork varies with the price of hogs.© 2009Since Δp = Δph, any increase in the price of hogs  Pearson Addison- causes an equal increase in the price ofWesley. All rights reserved. processed pork. 2-
  • 32. Solved Problem 2.4 In the first few weeks after the U.S. ban, the quantity of beef sold in Japan fell substantially, and the price rose. In contrast, three weeks after the first discovery, the U.S. price in January 2004 fell by about 15% and the quantity sold increased by 43% over the last week in October 2003. Use supply-and- demand diagrams to explain why these events occurred.© 2009 Pearson Addison-Wesley. All rights reserved. 2-
  • 33. Solved Problem 2.4© 2009 Pearson Addison-Wesley. All rights reserved. 2-
  • 34. Figure 2.8 A Ban on Rice ImportsRaises the Price in Japan p , Price of r ice per pound – A ban on rice imports S (ban) shifts the total supply of rice in Japan… S (no ban) p2 e2 which causes the p1 e1 equilibrium to change and the price to increase. D© 2009 Pearson Addison- Q Q2 Q, Tons of rice per year 1Wesley. All rights reserved. 2-
  • 35. Solved Problem 2.5 What is the effect of a United States quota on steel of Q on the equilibrium in the U.S. steel market? Hint: The answer depends on whether the quota binds (is low enough to affect the equilibrium).© 2009 Pearson Addison-Wesley. All rights reserved. 2-
  • 36. Solved Problem 2.5© 2009 Pearson Addison-Wesley. All rights reserved. 2-
  • 37. Figure 2.9 Price Ceiling on Gasoline p, $ per gallon Supply shifts to the S2 S1 left…. but gas stations must continue to charge a price of P1….. e1 p p1 = –1 p Price ceiling D Qs Q = Qdwhich creates an 1 © 2009 Pearson Addison-excess demand. Q, Gallons of gasoline per month Excess demand Wesley. All rights reserved. 2-
  • 38. Figure 2.10 Minimum Wage© 2009 Pearson Addison-Wesley. All rights reserved. 2-
  • 39. Why Supply Need Not Equal Demand The quantity that firms want to sell and the quantity that consumers want to buy at a given price need not equal the actual quantity that is bought and sold.  Example: price ceiling.© 2009 Pearson Addison-Wesley. All rights reserved. 2-
  • 40. Perfectly competitive markets Everyone is a price taker. Firms sell identical products. Everyone has full information about the price and quality of goods. Costs of trading are low.© 2009 Pearson Addison-Wesley. All rights reserved. 2-
  • 41. Figure 2A.1 Regression© 2009 Pearson Addison-Wesley. All rights reserved. 2-