Chapter The Basics of Supply and Demand Topics to Be Discussed  Supply and Demand  The Market Mechanism  Changes in Market Equilibrium  Elasticities of Supply and Demand  Short-Run Versus Long-Run Elasticities Chapter 2: The Basics of Supply and Slide Supply and Demand  The Supply Curve  The supply curve shows how much of a good producers are willing to sell at a given price, holding constant other factors that might affect quantity supplied Chapter 2: The Basics of Supply and Slide Supply and Demand  The Supply Curve  This price-quantity relationship can be shown by the equation: Qs = QS (P) Chapter 2: The Basics of Supply and Slide Supply and Demand The TheSupply Supply Curve CurveGraphically Graphically Price ($ per unit) Vertical axis measures price (P) received per unit in dollars Horizontal axis measures quantity (Q) supplied in number of units per time period Quantity Chapter 2: The Basics of Supply and Slide Supply and Demand Price ($ per unit) S The TheSupply Supply Curve CurveGraphically Graphically P2 The supply curve slopes upward demonstrating that at higher prices firms will increase output P1 Q1 Q2 Chapter 2: The Basics of Supply and Quantity Slide Supply and Demand  Non-price Determining Variables of Supply  Costs of Production  Labor  Capital  Raw Materials  Technology  Government regulations Chapter 2: The Basics of Supply and Slide Supply and Demand Change Changein inSupply Supply  The cost of raw materials falls P  At P1, produce Q2  At P2, produce Q1 P1  Supply curve shifts right to S’ P2  S S’ More produced at any price on S’ than on S Q0 Chapter 2: The Basics of Supply and Q1 Q2 Slide Q Supply and Demand  The Demand Curve  The demand curve shows how much of a good consumers are willing to buy as the price per unit changes holding non-price factors constant.  This price-quantity relationship can be shown by the equation: QD = QD(P) Chapter 2: The Basics of Supply and Slide Supply and Demand Price ($ per unit) Vertical axis measures price (P) paid per unit in dollars Horizontal axis measures quantity (Q) demanded in number of units per time period Quantity Chapter 2: The Basics of Supply and Slide Elasticities of Supply and Demand Elasticities Elasticitiesof ofSupply Supply  Price elasticity of supply measures the percentage change in quantity supplied resulting from a percent change in price.  The elasticity is usually positive because price and quantity supplied are directly related. Chapter 2: The Basics of Supply and Slide Elasticities of Supply and Demand Elasticities Elasticitiesof ofSupply Supply  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 Slide Short-Run Versus Long-Run Elasticities Demand Demand  Most goods and services:  Short-run elasticity is less than long-run elasticity. (e.g. gasoline)  Other Goods (durables):  Short-run elasticity is greater than long-run elasticity (e.g. automobiles) Chapter 2: The Basics of Supply and Slide Gasoline: Short-Run and Long-Run Demand Curves Price DSR People tend to drive smaller and more fuel efficient cars in the long-run Gasoline DLR Quantity Chapter 2: The Basics of Supply and Slide Automobiles: Short-Run and Long-Run Demand Curves Price DLR People may put off immediate consumption, but eventually older cars must be replaced. Automobiles DSR Quantity Chapter 2: The Basics of Supply and Slide Short-Run Versus Long-Run Elasticities Supply Supply  Most goods and services:  Long-run price elasticity of supply is greater than short-run price elasticity of supply.  Other Goods (durables, recyclables):  Long-run price elasticity of supply is less than short-run price elasticity of supply Chapter 2: The Basics of Supply and Slide Short-Run Versus Long-Run Elasticities Primary PrimaryCopper: Copper:Short-Run Short-Runand and Long-Run Long-RunSupply SupplyCurves Curves Price SSR SLR Due to limited capacity, firms are limited by output constraints in the short-run. In the long-run, they can expand. Quantity Chapter 2: The Basics of Supply and Slide Short-Run Versus Long-Run Elasticities Secondary SecondaryCopper: Copper:Short-Run Short-Runand and Long-Run Long-RunSupply SupplyCurves Curves Price SLR SSR Price increases provide an incentive to convert scrap copper into new supply. In the long-run, this stock of scrap copper begins to fall. Quantity Chapter 2: The Basics of Supply and Slide Short-Run Versus Long-Run Elasticities Coffee Coffee Price S’ S A freeze or drought decreases the supply of coffee 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 Quantity Slide Short-Run Versus Long-Run Elasticities Coffee Coffee Price S’ S P2 P0 Intermediate-Run 1) Supply and demand are more elastic 2) Price falls back to P2. 3) Quantity falls to Q2 D Q2 Q0 Chapter 2: The Basics of Supply and Quantity Slide Short-Run Versus Long-Run Elasticities Coffee Coffee Price Long-Run 1) Supply is extremely elastic. 2) Price falls back to P0. 3) Quantity increase to Q0. S P0 D Q0 Chapter 2: The Basics of Supply and Quantity Slide Effects of Government Intervention --Price Controls  If the government decides that the equilibrium price is too high, they may establish a maximum allowable ceiling price. Chapter 2: The Basics of Supply and Slide Effects of Price Controls Price S If price is regulated to be no higher than Pmax, quantity supplied falls to Q1 and quantity demanded increases to Q2. A shortage results P0 Pmax D Excess demand Q0 Chapter 2: The Basics of Supply and Quantity Slide Summary  Supply-demand analysis is a basic tool of microeconomics.  The market mechanism is the tendency for supply and demand to equilibrate, so that there is neither excess demand nor excess supply Chapter 2: The Basics of Supply and Slide Summary  Elasticities describe the responsiveness of supply and demand to changes in price, income, and other variables.  Elasticities pertain to a time frame. Chapter 2: The Basics of Supply and Slide End of Chapter [...]... in the price Chapter 2: The Basics of Supply and Slide Elasticities of Supply and Demand  The price elasticity of demand is: EP = (%∆Q)/(%∆P) Chapter 2: The Basics of Supply and Slide Elasticities of Supply and Demand Price Elasticity of Demand Price Elasticity of Demand  So the price elasticity of demand is: ∆Q/Q P ∆Q EP = = ∆P/P Q ∆P Chapter 2: The Basics of Supply and Slide Elasticities of Supply. .. Chapter 2: The Basics of Supply and Q2 Slide Q Shifts in Supply and Demand  When supply and demand change simultaneously, the impact on the equilibrium price and quantity is determined by: 1) The relative size and direction of the change 2) The shape of the supply and demand curves Chapter 2: The Basics of Supply and Slide Elasticities of Supply and Demand  Generally, elasticity is a measure of the sensitivity... 1, the percent change in quantity is less than the percent change in price We say the demand is price inelastic Chapter 2: The Basics of Supply and Slide Elasticities of Supply and Demand Price Elasticity of Demand Price Elasticity of Demand  The primary determinant of price elasticity of demand is the availability of substitutes  Many  Few substitutes, demand is price elastic substitutes, demand. .. 2: The Basics of Supply and Slide 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 8 Q Slide Price Elasticities of Demand Price Infinitely Elastic Demand D P* EP = - ∞ Quantity Chapter 2: The Basics of Supply. .. sensitivity of one variable to another  It tells us the percentage change in one variable in response to a one percent change in another variable Chapter 2: The Basics of Supply and Slide Elasticities of Supply and Demand Price Elasticity of Demand Price Elasticity of Demand  Measures the sensitivity of quantity demanded to price changes  It measures the percentage change in the quantity demanded for... Chapter 2: The Basics of Supply and Slide Supply and Demand Change in Demand Change in Demand  Income Increases  At P1, demand Q2  Demand Curve shifts right  D D’ P2 At P2, demand Q1  P More purchased at any price on D’ than on D P1 Q0 Chapter 2: The Basics of Supply and Q1 Q2 Slide Q The Market Mechanism Price ($ per unit) S The curves intersect at equilibrium, or marketclearing, price At P0 the quantity... 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 (absolute value) > 1, the percent change in quantity is greater than the percent change in price Demand is price elastic Chapter 2: The Basics of Supply and Slide Elasticities of Supply and Demand  Interpreting Price Elasticity of Demand Values 3)... by the relative level of supply and demand  Supply and demand are determined by particular values of supply and demand determining variables  Changes in any one or combination of these variables can cause a change in the equilibrium price and/ or quantity Chapter 2: The Basics of Supply and Slide Changes In Market Equilibrium  Raw material prices fall  P D S S’ S shifts to S’  Surplus @ P1 of Q1,.. .Supply and Demand Price ($ per unit) The demand curve slopes downward demonstrating that consumers are willing to buy more at a lower price as the product becomes relatively cheaper and the consumer’s real income increases D Quantity Chapter 2: The Basics of Supply and Slide Supply and Demand  Non-price Determining Variables of Demand  Income  Consumer  Price Tastes of Related Goods... falls to the market-clearing price P0 D Q0 Chapter 2: The Basics of Supply and Quantity Slide The Market Mechanism A Surplus A Surplus  The market price is above equilibrium  There is excess supply  Producers lower prices  Quantity demanded increases and quantity supplied decreases  The market continues to adjust until the equilibrium price is reached Chapter 2: The Basics of Supply and Slide The Market . Equilibrium  Elasticities of Supply and Demand  Short-Run Versus Long-Run Elasticities Chapter 2: The Basics of Supply and Demand Slide 3 Supply and Demand  The Supply Curve  The supply curve shows how much of. dollars Supply and Demand The Supply Curve Graphically The Supply Curve Graphically Quantity Price ($ per unit) Chapter 2: The Basics of Supply and Demand Slide 6 Supply and Demand S The supply. Chapter 2 The Basics of Supply and Demand Chapter 2: The Basics of Supply and Demand Slide 2 Topics to Be Discussed  Supply and Demand  The Market Mechanism  Changes