CHAPTER TWO- THE BASICS OF SUPPLY AND DEMAND
Supply + Demand analysis
understand/predict how changing economic conditions affect market price+ production
evaluate impact of government price controls, minimum wage, price supports, production incentives
determine how taxes, subsidies, tarrifs, import quots affect consumers+ producers
The supply curve
relationship between the quatity producers are willing to sell + the price of the good
upward sloping- the higher the price, the more firms are willing to produce and sell
factors that affect supply
production costs, wages, interest charges, costs of raw materials- affect the quantity producers are willing to sell
production costs decrease- output increases no matter the market price
The Demand Curve
relationship between the quantity of a food consumers are willing to buy and the price of the good
quantity demanded depends of price
donward sloping- purchase more as its price decreases
factors affecting demand curve
income, the weather, price of other goods
higher income increases quantity demanded- D -> D'( on diagram)- shift to the right
Substitute vs Complements
substitutes
increase in price of one good - increase in QD of the other
Complements
increase in price of one good leads to decrease in QD of other
The Market Mechanism
equilibrium
price where QS = QD
tendency in a free market for price to change until the market clears
use the supply and demand model when the market is at least roughly competitive- when buyers and sellers have little market power
Elasticity
e>1 demand is elastic
e<1 demand is inelastic
e=1 demand has unit elasticity
Ep=(%ΔQ)/(%ΔP)
Elasticites of Demand
cross- price elasticity of demand
% increase in QD resulting 1% increase in price of another
Income elasticity of demand
% change in QD resulting from 1% increase in income
click to edit
Completely Inelastic Demand
consumers buy fixed quantity of a good regardless of price
click to edit
Price elasticity of demand
click to edit
infinitely elastic demand
consumers will buy as much of a good as they can at a single price- any higher QD drops to 0- any lower QD increases without limit
click to edit
Elasticities of Supply
Price elasticity of supply
% change in QS resulting from 1% increase in price
Point elasticity of demand
elasticity at a particular point on the demand curve
Arc elasticity of demand
price elasticity calculated over a range of prices
Short run and Long run P.E.D
Demand more elastic in the long run- when price changes consumers need more time to respond
demand more inelastic in the short run- takes time for consumers to notice and respond to changes
most goods - I.E.D- smaller in the short run
durable good- longer run demand is inelastic
Cyclical Industries
industries where sales tend to magnify cyclical changes in GDP
sensitive to the business cycle
revenues generally higher during economic prosperity and lower during a downturn
Q=a-bP