Lecture#2(2)

Lecture #2: Supply and Demand Browning and Zupan Chapter 2 ECON306 Alexander Schibuola

OUTLINE: SUPPLY AND DEMAND ,[object Object],[object Object],[object Object],[object Object],[object Object],[object Object]

1. DEMAND: The Demand Curve ,[object Object],[object Object],[object Object],[object Object],[object Object],[object Object],[object Object],[object Object],[object Object],[object Object],[object Object],[object Object]

1. DEMAND: The Demand Curve ,[object Object],[object Object],[object Object],[object Object],D P Q d 7 0 6 0 5 100 4 200 3 300 2 400 1 500 7 6 5 1 2 3 4 100 200 300 400 600 500 700 0 1. Demand curve is a schedule of prices and quantities 2. Law of Demand—at lower P, Q d is greater 100 200 0 300 100 200 0 400 300 100 200 0 500 400 300 100 200 0 600 500 400 300 100 200 0 700 600 500 400 300 100 200 0 Underlying algebra: D: P = 6 – (1/100)*Q d , or Q d = 600 –100P P Q

1. DEMAND: The Demand Curve ,[object Object],[object Object],[object Object],[object Object],D P Q d 7 0 6 0 5 100 4 200 3 300 2 400 1 500 7 6 5 1 2 3 4 100 200 300 400 600 500 700 0 D’ (Q d )’ 100 200 300 400 500 600 700 3. Change in quantity demanded when we move along a given demand curve 4. Shift in demand = change in demand There’s been a change in Q d for all prices Underlying algebra: D: P = 6 – (1/100)*Q d , or Q d = 600 –100P D’: P= 8 – (1/100)*Q d , or Q d = 800 – 100P P Q

1. DEMAND: The Demand Curve ,[object Object],[object Object],[object Object],[object Object],[object Object],[object Object],[object Object]

1. DEMAND: The Demand Curve ,[object Object],[object Object],[object Object],[object Object],[object Object],[object Object]

1. DEMAND: The Demand Curve ,[object Object],[object Object],[object Object],[object Object]

1. DEMAND: The Demand Curve ,[object Object],[object Object],[object Object],[object Object],[object Object]

1. DEMAND: The Demand Curve ,[object Object],[object Object],[object Object],[object Object],[object Object],[object Object],[object Object],[object Object],[object Object]

1. DEMAND: The Demand Curve ,[object Object],[object Object],[object Object],[object Object],[object Object],[object Object],[object Object],[object Object],[object Object],CS i = R i – P* 1000-300=700 900-300 = 600 800-300 = 500 … 300-300 = 0 200-300 =-100 100-300 =-200 D S Q P P* Scale of P-axis in hundreds, e.g., 5 = $500 700 600 500 400 Graphically: The total consumer surplus is measured by the area underneath the demand curve and between the market price, P* 300 200 100 CS tot = 700 + 600 + … + 100 + 0 = $2800 0 1 2 3 4 5 6 7 8 9 10 1 2 3 4 5 6 7 8 9 10

2. SUPPLY: The Supply Curve ,[object Object],[object Object],[object Object],[object Object],[object Object],[object Object],[object Object],[object Object],[object Object],[object Object],[object Object],[object Object]

1. SUPPLY: The Supply Curve ,[object Object],[object Object],[object Object],[object Object],S P Q s 6 600 5 500 4 400 3 300 2 200 1 100 7 6 5 1 2 3 4 100 200 300 400 600 500 700 0 1. Supply curve is a schedule of prices and quantities 2. Law of Supply—at higher P, Q s is greater Underlying algebra: S: P = 0 + (1/100)*Q s , or Q s = 0 + 100P P Q

2. SUPPLY: The Supply Curve ,[object Object],[object Object],[object Object],[object Object],S P Q s 6 600 5 500 4 400 3 300 2 200 1 100 7 6 5 1 2 3 4 100 200 300 400 600 500 700 0 S’ (Q s )’ 800 700 600 500 400 300 3. Change in quantity supplied when we move along a given supply curve 4. Shift in supply = change in supply There’s been a change in Q s for all prices Underlying algebra: S: P = 0 + (1/100)*Q s , or Q s = 0 + 100P S’: P= -1+(1/100)*Q s , or Q s = -100 + 100P P Q

2. SUPPLY: The Supply Curve ,[object Object],[object Object],[object Object],[object Object],[object Object],[object Object],[object Object]

2. SUPPLY: The Supply Curve ,[object Object],[object Object],[object Object],[object Object],[object Object]

2. SUPPLY: The Supply Curve ,[object Object],[object Object],[object Object]

2. SUPPLY: The Supply Curve ,[object Object],[object Object],[object Object],[object Object]

2. SUPPLY: The Supply Curve ,[object Object],[object Object],[object Object],[object Object],[object Object],[object Object],[object Object],[object Object],[object Object]

2. SUPPLY: The Supply Curve ,[object Object],[object Object],[object Object],[object Object],[object Object],[object Object],[object Object],[object Object],[object Object],P* – R i = PS i 800-100 = 700 800-200 = 600 800-300 = 500 … 800-800 = 0 800-900 = -100 800-1000 = -200 D S Q P P* Scale of P-axis in hundreds, e.g., 5 = $500 Graphically: The total producer surplus is measured by the area underneath the market price, P* and between the supply curve PS tot = 700 + 600 + … + 100 + 0 = $2800 0 1 2 3 4 5 6 7 8 9 10 1 2 3 4 5 6 7 8 9 10 700 600 500 400 300 200 100

2. SUPPLY: The Supply Curve ,[object Object],[object Object],[object Object],[object Object],[object Object],[object Object],[object Object],[object Object],[object Object],[object Object]

2. SUMMARY I ,[object Object],[object Object],[object Object],[object Object],[object Object],[object Object],[object Object],[object Object],[object Object],[object Object],[object Object],[object Object],[object Object],[object Object]

2. SUMMARY II ,[object Object],[object Object],[object Object],[object Object],[object Object],[object Object],[object Object],[object Object],[object Object],[object Object],[object Object],[object Object],[object Object],[object Object]

3. Equilibrium ,[object Object],[object Object],[object Object],[object Object],[object Object],[object Object],[object Object],[object Object],[object Object],[object Object],D S Q P P* Q* 0 1 2 3 4 5 6 7 8 9 10 1 2 3 4 5 6 7 8 9 10

3. Equilibrium: Disequilibrium ,[object Object],[object Object],[object Object],[object Object],D S Q P P Q s Q d XD Figure: Market for gasoline Q in thousands, i.e., 2 = 2000 gallons P is price per gallon P = $3/gallon Buyers want more than sellers are willing to supply at P = 3 Their inventories are depleted faster than they can be replaced Sellers start to raise prices: Q d decreases and Q s increases Process continues until Q d = Q s Shortage exists if there is an excess demand (XD) for goods P* 0 1 2 3 4 5 6 7 8 9 10 1 2 3 4 5 6 7 8 9 10

3. Equilibrium: Disequilibrium ,[object Object],[object Object],[object Object],[object Object],D S Q P P Q d Q s XS Figure: Market for gasoline Q in thousands, i.e., 2 = 2000 gallons P is price per gallon P = $3/gallon Buyers want less than sellers are willing to supply at P = 7 Their inventories accumulate more than they can be sold Sellers start to decrease prices: Q s decreases and Q d increases Process continues until Q d = Q s Surplus exists if there is an excess supply (XS) of goods P* 0 1 2 3 4 5 6 7 8 9 10 1 2 3 4 5 6 7 8 9 10

4. CHANGES IN SUPPLY AND DEMAND ,[object Object],[object Object],[object Object],[object Object],[object Object],[object Object],[object Object],[object Object],[object Object],[object Object],D S Q P P 1 Q 1 D’ a b c Q d Q 2 P 2 Q s 0 1 2 3 4 5 6 7 8 9 10 1 2 3 4 5 6 7 8 9 10

4. CHANGES IN SUPPLY AND DEMAND ,[object Object],[object Object],[object Object],[object Object],[object Object],[object Object],[object Object],[object Object],[object Object],[object Object],D S Q P P 1 Q d a b c Q s Q 2 P 2 S’ Q 1 0 1 2 3 4 5 6 7 8 9 10 1 2 3 4 5 6 7 8 9 10

4. CHANGES IN SUPPLY AND DEMAND ,[object Object],[object Object],[object Object],[object Object],D S Q P P 1 Q 1 a b Q 2 P 2 S’ Rather than go through the dynamic transition from one equilibrium to another we just jump from one equilibrium to another HOW THIS GRAPH IS READ: A decrease in supply (shifts left) leads to a decrease in the quantity demanded . Equilibrium price (P*) increases and equilibrium quantity (Q*) decreases. 0 1 2 3 4 5 6 7 8 9 10 1 2 3 4 5 6 7 8 9 10

4. CHANGES IN SUPPLY AND DEMAND ,[object Object],[object Object],[object Object],D S Q P P 0 Q 0 0 d c b a Suppose next month, we observe that: a: P a > P 0 and Q a > Q 0 b: P b < P 0 and Q b > Q 0 c: P c < P 0 and Q c < Q 0 d: P d > P 0 and Q d < Q 0 We can infer whether supply or demand changes dominated the market over time A: Demand Increase A: Supply Increase A: Supply Decrease A: Demand Decrease e 0 1 2 3 4 5 6 7 8 9 10 1 2 3 4 5 6 7 8 9 10

4. CHANGES IN SUPPLY AND DEMAND ,[object Object],[object Object],[object Object],[object Object],[object Object],[object Object]

5. PRICE CONTOLS ,[object Object],[object Object],[object Object],[object Object],[object Object],[object Object]

5. PRICE CONTOLS ,[object Object],[object Object],[object Object],[object Object],[object Object],[object Object],[object Object],[object Object],D S Q P P c Q* XD New York apartment market Q in millions P in hundreds per month P c = price ceiling P* Q c 0 1 2 3 4 5 6 7 8 9 10 1 2 3 4 5 6 7 8 9 10

5. PRICE CONTOLS ,[object Object],[object Object],[object Object],[object Object],[object Object],[object Object],D S Q P P c Q* XD New York apartment market Q in millions P in hundreds per month P c = price ceiling P* Q c 0 1 2 3 4 5 6 7 8 9 10 1 2 3 4 5 6 7 8 9 10

5. PRICE CONTOLS ,[object Object],[object Object],[object Object],[object Object],[object Object],[object Object],[object Object],D S Q P P c Q* XD New York apartment market: Q in millions P in hundreds per month P c = price ceiling P* Q c Who benefits? -Landlords not in NYC -People who do manage to find a rent-controlled apartment 0 1 2 3 4 5 6 7 8 9 10 1 2 3 4 5 6 7 8 9 10

5. PRICE CONTOLS ,[object Object],[object Object], Shortage Q d > Q s

6. ELASTICITIES ,[object Object],[object Object],[object Object],[object Object],[object Object],[object Object],[object Object],[object Object]

6. ELASTICITIES: (1) Definition and Calculation: (A) Price Elasticity of Demand ,[object Object],[object Object]

6. ELASTICITIES: (1) Definition and Calculation: (A) Price Elasticity of Demand ,[object Object],[object Object],[object Object],[object Object],[object Object],[object Object],[object Object],[object Object],[object Object],[object Object]

6. ELASTICITIES: (1) Definition and Calculation: (A) Price Elasticity of Demand ,[object Object],[object Object],[object Object],[object Object],[object Object],[object Object]

6. ELASTICITIES: (1) Definition and Calculation: (A) Price Elasticity of Demand ,[object Object],[object Object],[object Object],[object Object],[object Object],[object Object],[object Object]

6. ELASTICITIES: (1) Definition and Calculation: (B) Income Elasticity of Demand ,[object Object],[object Object]

6. ELASTICITIES: (1) Definition and Calculation: (B) Income Elasticity of Demand ,[object Object],[object Object],[object Object],[object Object],[object Object],[object Object],[object Object],[object Object],[object Object],[object Object]

6. ELASTICITIES: (1) Definition and Calculation: (B) Income Elasticity of Demand ,[object Object],[object Object],[object Object],[object Object]

6. ELASTICITIES: (1) Definition and Calculation: (C) Cross-Price Elasticity of Demand ,[object Object],[object Object]

6. ELASTICITIES: (1) Definition and Calculation: (C) Cross-Price Elasticity of Demand ,[object Object],[object Object],[object Object],[object Object],[object Object],[object Object],[object Object],[object Object],[object Object],[object Object]

6. ELASTICITIES: (1) Definition and Calculation: (C) Cross-Price Elasticity of Demand ,[object Object],[object Object],[object Object],[object Object],[object Object]

6. ELASTICITIES: (1) Definition and Calculation: (D) Price Elasticity of Supply ,[object Object],[object Object]

6. ELASTICITIES: (1) Definition and Calculation: (D) Price Elasticity of Supply ,[object Object],[object Object],[object Object],[object Object],[object Object],[object Object],[object Object],[object Object],[object Object],[object Object]

6. ELASTICITIES: (1) Definition and Calculation: (D) Price Elasticity of Supply ,[object Object],[object Object],[object Object],[object Object],[object Object],[object Object],[object Object]

6. ELASTICITIES: (2) Application & Interpretation: (A) Price Elasticity of Demand ,[object Object],[object Object],[object Object],[object Object],[object Object],[object Object],[object Object],[object Object],9.9 10.0 P t 102 100 Q dt t = 1 t = 0 Given:

6. ELASTICITIES: (2) Application & Interpretation: (B) Income Elasticity of Demand ,[object Object],[object Object],[object Object],[object Object],[object Object],[object Object],[object Object],[object Object],101.0 100.0 I t 101 100 Q dt t = 1 t = 0 Given:

6. ELASTICITIES: (2) Application & Interpretation: (B) Income Elasticity of Demand ,[object Object],[object Object],[object Object],[object Object],[object Object],[object Object],[object Object],[object Object],101.0 100.0 I t 99 100 Q dt t = 1 t = 0 Given:

6. ELASTICITIES: (2) Application & Interpretation: (C) Cross-Price Elasticity of Demand ,[object Object],[object Object],[object Object],[object Object],[object Object],[object Object],[object Object],[object Object],5.1 5.0 P Rt 101 100 Q dt t = 1 t = 0 Given:

6. ELASTICITIES: (2) Application & Interpretation: (C) Cross-Price Elasticity of Demand ,[object Object],[object Object],[object Object],[object Object],[object Object],[object Object],[object Object],[object Object],4.9 5.0 P Rt 101 100 Q dt t = 1 t = 0 Given:

6. ELASTICITIES: (2) Application & Interpretation: (D) Price Elasticity of Supply ,[object Object],[object Object],[object Object],[object Object],[object Object],[object Object],[object Object],[object Object],10.1 10.0 P Rt 102 100 Q st t = 1 t = 0 Given:

6. ELASTICITIES: SUMMARY ,[object Object],[object Object],[object Object],[object Object],[object Object],[object Object],[object Object],[object Object]

6. ELASTICITIES: SUMMARY II ,[object Object],[object Object],[object Object],[object Object],[object Object],[object Object],[object Object],[object Object],[object Object],[object Object]

6. ELASTICITIES: SUMMARY II ,[object Object],[object Object],[object Object],[object Object],[object Object],[object Object],[object Object],[object Object],[object Object]

6. ELASTICITIES: SUMMARY II ,[object Object],[object Object],[object Object],[object Object],[object Object],[object Object],[object Object],[object Object],[object Object],[object Object],[object Object],[object Object]

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