Chapter 2 su1

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Chapter 2 su1

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

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