The document discusses supply and demand curves. It defines the supply curve as showing how much producers are willing to sell at different prices, and the demand curve as showing how much consumers are willing to buy at different prices. It then explains how shifts in supply or demand curves due to changes in costs, incomes, etc. result in new market equilibrium prices and quantities where supply and demand are equal. The document also introduces elasticity measures for supply and demand, and how short-run elasticities differ from long-run elasticities. It provides examples of how to predict equilibrium price and quantity changes given information about initial equilibrium and elasticities.
The document discusses supply and demand curves. It defines the supply curve as showing how much producers are willing to sell at different prices, and the demand curve as showing how much consumers are willing to buy at different prices. It then explains how shifts in supply or demand curves due to changes in costs, incomes, etc. result in new market equilibrium prices and quantities where supply and demand are equal. The document also introduces elasticity measures for supply and demand, and how short-run elasticities differ from long-run elasticities. It provides examples of how to predict equilibrium price and quantity changes given information about initial equilibrium and elasticities.
The document discusses supply and demand curves. It defines the supply curve as showing how much producers are willing to sell at different prices, and the demand curve as showing how much consumers are willing to buy at different prices. It then explains how shifts in supply or demand curves due to changes in costs, incomes, etc. result in new market equilibrium prices and quantities where supply and demand are equal. The document also introduces elasticity measures for supply and demand, and how short-run elasticities differ from long-run elasticities. It provides examples of how to predict equilibrium price and quantity changes given information about initial equilibrium and elasticities.
The document discusses supply and demand curves. It defines the supply curve as showing how much producers are willing to sell at different prices, and the demand curve as showing how much consumers are willing to buy at different prices. It then explains how shifts in supply or demand curves due to changes in costs, incomes, etc. result in new market equilibrium prices and quantities where supply and demand are equal. The document also introduces elasticity measures for supply and demand, and how short-run elasticities differ from long-run elasticities. It provides examples of how to predict equilibrium price and quantity changes given information about initial equilibrium and elasticities.
absolute change in the variable divided by the original level of the variable. So the price elasticity of demand is also:
Q/Q P Q EP
P/P Q P Chapter 2: The Basics of Supply and Demand
Slide 14
Elasticities of Supply and Demand
Interpreting Price Elasticity of Demand Values
1) Because of the inverse relationship between P and Q; EP is negative. 2) If |EP| > 1, the % change in quantity demanded is greater than the % change in price. We say demand is price elastic. 3) If |EP| < 1, the % change in quantity demanded is less than the % change in price. We say demand is price inelastic.
Chapter 2: The Basics of Supply and Demand
Slide 15
Price Elasticities of Demand
Price 4
EP -
The lower portion of
a downward sloping demand curve is less elastic than the upper portion.
Q = 8 - 2P
Ep = -1 2
Linear Demand Curve
Q = a - bP Q = 8 - 2P Ep = 0 4
Chapter 2: The Basics of Supply and Demand
Q Slide 16
Elasticities of Supply and Demand
Other OtherDemand DemandElasticities Elasticities
Income elasticity of demand measures the % change in
quantity demanded resulting from a one percent change in income. The income elasticity of demand is:
Q/Q I Q EI
I/I Q I Chapter 2: The Basics of Supply and Demand
Slide 17
Elasticities of Supply and Demand
Other OtherDemand DemandElasticities Elasticities
Cross price elasticity of demand = the % change in the quantity
demanded of one good that results from a one percent change in the price of another good.
The cross price elasticity for substitutes is positive, while that for complements is negative. For example, consider the substitute goods, butter and margarine.
Qb/Qb Pm Qb EQbPm
Pm/Pm Qb Pm Chapter 2: The Basics of Supply and Demand
Slide 18
Elasticities of Supply and Demand
Elasticities Elasticitiesof ofSupply Supply
Price elasticity of supply measures the % change in
quantity supplied resulting from a 1% change in price.
The elasticity is usually positive because price and
quantity supplied are positively related (Higher price gives producers an incentive to increase output)
We can refer to elasticity of supply with respect to
interest rates, wage rates, and the cost of raw materials.
Chapter 2: The Basics of Supply and Demand
Slide 19
SR Versus LR Elasticities Price PriceElasticity Elasticityof ofDemand Demand
Price elasticity of demand varies with the amount of
time consumers have to respond to a price.
Most goods and services:
Short-run elasticity is less than long-run elasticity (e.g.
gasoline). People tend to drive smaller and more fuel efficient cars in the long-run
Other Goods (durables):
Short-run elasticity is greater than long-run elasticity (e.g.
automobiles). People may put off immediate consumption, but eventually older cars must be replaced.
Chapter 2: The Basics of Supply and Demand
Slide 20
SR Versus LR Elasticities Income IncomeElasticities Elasticities
Most goods and services:
Income elasticity is greater in the long-run than in the short run. For example, higher incomes may be converted into bigger cars so the income elasticity of demand for gasoline increases with time.
Other Goods (durables):
Income elasticity is less in the long-run than in the short-run. For example, consumers will initially want to hold more cars. Later, purchases will only to be to replace old cars.
Chapter 2: The Basics of Supply and Demand
Slide 21
SR Versus LR Elasticities Price PriceElasticity Elasticityof of Supply Supply
Most goods and services:
Long-run price elasticity of supply is greater than short-run
price elasticity of supply. Due to limited capacity, firms are output constrained in the short-run. In the long-run, they can expand.
Other Goods (durables, recyclables):
Long-run price elasticity of supply is less than short-run price
elasticity of supply. For example, consider the secondary copper market. Copper price increases provide an incentive to convert scrap copper into new supply. In the long-run, this stock of scrap copper begins to fall.
Chapter 2: The Basics of Supply and Demand
Slide 22
SR Versus LR Elasticities: Coffee
Coffee Coffee
S Coffee prices are volatile: A freeze or drought decreases the supply of coffee in Brazil
Price
P1
P0 Short-Run 1) Supply is completely inelastic 2) Demand is relatively inelastic 3) Very large change in price
D Q1
Q0
Chapter 2: The Basics of Supply and Demand
Quantity Slide 23
Understanding and Predicting the Effects
of Changing Market Conditions 1.
We must learn how to fit linear demand and supply
curves to market data.
2.
We determine numerically how a change in one
variable will cause supply or demand to shift and so affect the equilibrium price and quantity.
3.
Assume the Available Data are:
Equilibrium Price, P*
Equilibrium Quantity, Q*
Price elasticity of supply, ES, and demand, ED.
Chapter 2: The Basics of Supply and Demand
Slide 24
Understanding and Predicting the Effects
of Changing Market Conditions Price
Supply: Q = c + dP
a/b
ED = -bP*/Q* ES = dP*/Q*
P*
-c/d
Demand: Q = a - bP Q*
Chapter 2: The Basics of Supply and Demand
Quantity Slide 25
Understanding and Predicting the Effects
of Changing Market Conditions
Lets begin with the equations for supply
and demand, and the elasticities: Demand: QD = a - bP Supply:
QS = c + dP
E (P/Q)( Q/P) Chapter 2: The Basics of Supply and Demand
Slide 26
Understanding and Predicting the Effects
of Changing Market Conditions
Note: for linear demand curves, Q/ P is
constant (equal to the slope of the curve).
Substituting the slopes for each into the
formula for elasticity, we get:
ED - b(P * /Q*)
ES d(P * /Q*) Chapter 2: The Basics of Supply and Demand
Slide 27
Understanding and Predicting the Effects
of Changing Market Conditions
Suppose we have values for ED, ES, P*,
and Q*, we can then solve for b & d, and a & c.
QD a bP QS c dP Chapter 2: The Basics of Supply and Demand
Slide 28
Example: The Copper Market
Suppose we want to derive the long-run
supply and demand for copper: The
data are:
Q* = 7.5 mmt/yr.
P* = 75 cents/pound
ES = 1.6
ED = -0.8
Chapter 2: The Basics of Supply and Demand
Slide 29
Understanding and Predicting the Effects
of Changing Market Conditions Price
Supply: QS = -4.5 + 16P
1.69 = a/b
.75
+.28 = -c/d
Demand: QD = 13.5 - 8P 7.5
Chapter 2: The Basics of Supply and Demand
Mmt/yr Slide 30
Example 1: Real versus Nominal Prices of Copper
1965 - 1999
Chapter 2: The Basics of Supply and Demand
Slide 31
Declining Demand and the Behavior of Copper Prices
The relevant factors leading to a decrease in the
demand for copper are: 1) A decrease in the growth rate of power generation 2) The development of substitutes: fiber optics and aluminum
We will try to estimate the impact of a 20% decrease in
the demand for copper.
Recall the equation for the demand curve:
Q = 13.5 - 8P
Chapter 2: The Basics of Supply and Demand
Slide 32
Real versus Nominal
Prices of Copper 1965 - 1999
Multiply the demand equation by 0.80 to get the new equation. This gives: Q = (0.80)(13.5 - 8P) = 10.8 - 6.4P
