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# Ch 2 supply demand and elasticity-2.1.ppt

28 Mar 2023
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### Ch 2 supply demand and elasticity-2.1.ppt

1. Demand and Supply cont. 2.1 Lecturer: Assoc Prof Ergin Akalpler
2. Definition:The Market Supply function tells us how the quantity of a good supplied by the sum of all producers in the market depends on various factors Qs = f (p,po,w,…) 2
3. Definition:The Supply Curve plots the aggregate quantity of a good that will be offered for sale at different prices Qs = Q (p) 3
4. 4 Example: Supply Curve for Wheat in Canada 0 Quantity (billions of bushels per year) Price (dollars per bushel) Supply curve for wheat in Canada 0.15
5. Definition:The Law of Supply Curve states that the quantity of a good offered increases when the price of this good increases.  Empirical regularity 5
6. The supply curve shifts when factors other than own price change…  If the change increases the willingness of producers to offer the good at the same price, the supply curve shifts right  If the change decreases the willingness of producers to offer the good at the same price, the supply curve shifts left 6
7. A move along the supply curve for a good can only be triggered by a change in the price of that good. A shift in the supply curve for a good can be triggered by a change in any other factor A change that affects the producers’ willingness to offer the good. 7
8. 8 Example: Canadian Wheat • QS = p + .05r • QS = quantity of wheat (billions of bushels) • p = price of wheat (dollars per bushel) • r = average rainfall in western Canada (inches) • Suppose price is \$2 • Quantity supplied no rainfall = \$2 • Quantity supplied with rainfall of 3” = \$2.15 • As rainfall increases, supply curve shifts right • (e.g., r = 4 => Q = p + 0.2)
9. 9 Price (\$) Quantity, Billion bushels 0
10. 10 Price (\$) Quantity, Billion bushels 0 r = 0 Supply with no rain
11. 11 Price (\$) Quantity, Billion bushels 0 r = 0 r = 3 .15 Supply with no rain Supply with 3” rain Price (\$) Quantity, Billion bushels 0 r = 0 r = 3 .15 Supply with no rain Supply with 3” rain
12. 12 Law of Demand Definition: The Law of demand Curve states that the quantity of a good offered increases when the price of this good decreases
13. 13 Law of Demand Shift can be caused on the figure: Increases in demand are shown by a shift to the right in the demand curve. This could be caused by a number of factors, including a rise in income (right figure ), a rise in the price of a substitute or a fall in the price of a complement (left figure).
14. 14
15. Definition:A market equilibrium is a price such that, at this price, the quantities demanded and supplied are the same. Demand and supply curves intersect at equilibrium. 15
16. 16 Example: Market for Cranberries • Suppose • QD = 500 – 4P • QS = –100 + 2P • Where • P = price of cranberries (euros per barrel) • Q = demand or supply (in millions of barrels/year)
17. 17 Example: Market for Cranberries • The equilibrium price is calculated by equating demand to supply: QD = QS or 500 – 4P = –100 + 2P • Solving for P: P* = 100 • To get equilibrium quantity, plug equilibrium price into either demand or supply • Into demand: Q* = 500 – 4(100) = 100 • Into supply: Q* = –100 + 2(100) = 100
18. 18 Example: The Market For Cranberries Price Quantity Market Supply: QS = -100 + 2P 50
19. 19 Price Quantity Price Quantity Market Demand: Qd = 50 – 4P 125 Example: The Market For Cranberries Market Supply: QS = -100 + 2P 50
20. 20 Price Quantity Q* = 100 P*=100 125 • Example: The Market For Cranberries Market Supply: QS = -100 + 2P 50 Market Demand: Qd = 50 – 4P
21. 21 Definition: If at a given price, sellers cannot sell as much as they would like, there is excess supply. Definition: If at a given price, buyers cannot purchase as much as they would like, there is excess demand.
22. 22 Price Quantity Market Demand Market Supply 50 125 Example: Excess Supply in the Market For Cranberries
23. 23 Price Quantity Market Demand Market Supply Q* 50 125 QS Qd Example: Excess Supply in the Market For Cranberries
24. 24 Price Quantity Market Demand Market Supply Q* 125 Excess Supply • • QS Qd 50 Example: Excess Supply in the Market For Cranberries
25. 25  If there is no excess supply or excess demand, there is no pressure for prices to change and we are in equilibrium.  When a change in an exogenous variable causes the demand curve or the supply curve to shift, the equilibrium shifts as well
26. 26 Definition: The own price elasticity of demand is the percentage change in quantity demanded brought about by a one-percent change in the price of the good Q,P= (% Q) = (Q/Q) = dQ . Pt-1 (% P) (P/P) dP Qt-1
27. 27  Elasticity is not the slope  Slope is the ratio of absolute changes in quantity and price. (= dQ/dP).  Elasticity is the ratio of relative (or percentage) changes in quantity and price.
28. 28 1. Q,P = 0  Perfectly inelastic demand  Quantity demanded is completely insensitive to changes in price 2. Q,P  (-1, 0)  Inelastic demand  Quantity demanded is relatively insensitive to changes in price 3. Q,P = -1  Unitary elastic demand  Percentage increase in quantity demanded equals percentage decrease in price
29. 29 4. Q,P  (-, -1)  Elastic demand  Quantity demanded is relatively sensitive to changes in price 5. Q,P = -   Perfectly elastic demand  Any increase in price results in quantity demanded decreasing to zero  Any increase in price results in quantity demanded increasing to infinity.
30. 30 Example: Linear Demand Curve • Suppose QD = a – bP • a, b : positive constants • P: price • Notes: • -b is the slope • a/b is the choke price
31. 31 Example: Linear Demand Curve • The elasticity is Q,P= dQ . P = – b . P dP Q Q • So for linear demand curves • Slope is constant. • Elasticity falls from 0 to - along the demand curve. • E.g., suppose Q = 400 – 10P • At P = 30, Q = 100, so Q,P= dQ . P = – b . P = –10 . 30 = –3 (elastic) dP Q Q 100
32. 32 0 P Q Example: Elasticity with a Linear Demand Curve
33. 33 0 P Q a/2 a a/2b a/b • Example: Elasticity with a Linear Demand Curve
34. 34 0 P Q a/2 a a/2b a/b • Q,P = -1 Inelastic region Elastic region Q,P = - Q,P = 0 Example: Elasticity with a Linear Demand Curve
35. FOR NON LINEAR CURVE FLATTER PART OF CURVE BECOMES MORE ELASTIC AND VERTICAL PART OF THE CURVE IS INELASTIC 35
36. 36 Example: Constant Elasticity Demand Curve • Suppose QD = Apε • A: constant • P: price • ε : elasticity of demand • The elasticity is Q,P= dQ . P = εApε-1 . P = ε dP Q Q • So for Constant Elasticity demand curves • Elasticity is constant. • Slope falls from 0 to - along the demand curve.
37. 37 Quantity Price 0 Q P • Observed price and quantity Example: A Constant Elasticity versus a Linear Demand Curve
38. 38 Quantity Price 0 Q P • Observed price and quantity Linear demand curve Example: A Constant Elasticity versus a Linear Demand Curve
39. 39 Quantity Price 0 Q P • Observed price and quantity Constant elasticity demand curve Example: A Constant Elasticity versus a Linear Demand Curve
40. 40 Quantity Price 0 Q P • Observed price and quantity Constant elasticity demand curve Linear demand curve Example: A Constant Elasticity versus a Linear Demand Curve
41. 41 Quantity Price 0 Example: A Constant Elasticity versus a Linear Demand Curve •
42. 42  Factors that determine price elasticity of demand  Demand tends to be more price-elastic when there are good substitutes for the good  Demand tends to be more price-elastic when consumer expenditure in that good is large  Demand tends to be less price-elastic when consumers consider the good as a necessity.
43. 43 Price Elasticity of Demand for Selected Grocery Products, Chicago, 1990s Category Estimated Q,P Soft Drinks -3.18 Canned Seafood -1.79 Canned Soup -1.62 Cookies -1.6 Breakfast Cereal -0.2 Toilet Paper -2.42 Laundry Detergent -1.58 Toothpaste -0.45 Snack Crackers -0.86 Frozen Entrees -0.77 Paper Towels -0.05 Dish Detergent -0.74 Fabric Softener -0.73
44. 44 Model Price Estimated Q,P Mazda 323 \$5,039 -6.358 Nissan Sentra \$5,661 -6.528 Ford Escort \$5,663 -6.031 Lexus LS400 \$27,544 -3.085 BMW 735i \$37,490 -3.515 Source: Berry, Levinsohn and Pakes, "Automobile Price in Market Equilibrium," Econometrica 63 (July 1995), 841-890. Example: Price Elasticities of Demand for Automobile Makes, 1990.
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