GLS1e - Chapter2 Goolsbee Levitt Economics

Supply and Demand
Chapter Outline
2.1 Markets and Models 2.2 Demand 2.3 Supply 2.4 Market Equilibrium 2.5 Elasticity 2.6 Conclusion
Copyright 2013 Worth Publishers, All Rights Reserved Microeconomics Goolsbee/Levitt/ Syverso 1/e
2-1
Introduction
In this chapter, we introduce the supply and demand model. We will: Describe the basics o supply and demand !se equations and "raphs to represent supply and demand #naly$e markets or "oods and ser%ices usin" the supply and demand model
2-2
2.1 Markets and Models

hat is a market!
# market is characteri$ed by a speci ic &roduct or ser%ice bein" bou"ht and sold 'ocation &oint in time
Markets "acilitate e#chan$e, includin" economic resources and inal "oods and ser%ices
2-3
2.1 Markets and Models

What are the supply and demand or a "ood(
Supply% )he combined amount o a "ood that all producers in a market are willin" to sell Demand% )he combined amount o a "ood that all consumers are willin" to buy
2-4
2.2 Demand
&rice 'um(er o" consumers Consumer )ealth Consumer tastes &rices o" other* related $oods
Compliments and substitutes
What actors in luence the demand or a "ood or ser%ice(
2-5
2.2 Demand
Many actors in luence demand or "oods and ser%ices* is there one actor that stands out(
+ocus on how the price o a "ood in luences the +uantity demanded by consumers Demand cur,e , describes relationship between quantity demanded and price, holdin" all other actors constant
2-6
2.2 Demand
+i"ure -.. Demand or )omatoes
2-7
2.2 Demand
(dollars/pound)
2
#t 13, consumers demand no oran"es4 this is known as the demand choke price #s the price drops, consumers demand a "reater quantity o oran"es We draw a demand cur,e that connects all the obser%ed price5 quantity combinations -.M.M/.- 0O 12 13S 21/.2 4-1&5S6
Quantity of oranges (pounds) 2-8
Consider the market or oran"es. We want to map out the quantity /in pounds0 demanded by local consumers at %arious prices /12pound0 Price of oranges
6 5 4 3 2 1
400
800
1,200 1,600 2,000 2,400
2.2 Demand
We can also describe the demand cur%e mathematically
)he demand cur%e on the pre%ious slide is "i%en as QD = 2,400 400P where QD is the quantity o oran"es demanded /in pounds0 and P is the price o oran"es /12pound0 It is common in economics to plot price on the %ertical a6is. Sol%in" or price as a unction o quantity demanded yields the in,erse demand cur,e
P = 6 0.0025QD
2-9
2.2 Demand
What about the other actors that in luence demand(

)he demand cur%e is "raphed in two dimensions4 all other actors are assumed constant I another actor chan"es, the demand cur%e will shift
Chan$e in +uantity demanded , a mo%ement along the demand cur%e in response to a price chan"e, with e%erythin" else held constant Chan$e in demand , a shi t o the entire demand cur%e caused by a chan"e in a non5price actor that a ects demand
2-10
2.2 Demand
+i"ure -.- Shi ts in the Demand Cur%e
2-11
1pplication
Mad Co) disease and (ee" Bovine spongiform encephalopathy /Mad Cow Disease0, is a potentially atal disease contracted throu"h the consumption o in ected bee products Schlenker and 7illas58oas /-99:0 in%esti"ate the impact o the announcement o the irst con irmed case o MCD in the !S /December -;, -99;0 on daily bee sales or a national supermarket chain )he authors ind a si"ni icant drop in the quantity o bee purchased ollowin" the announcement: appro6imately -.< less bee was purchased in the ollowin" ;= days >ow do we represent this ?shock@ usin" demand Citation: Wol ram Schlenker and So ia 8. 7ilas58oas. -99:. Consumer and Market Aesponses to Mad Cow cur%es( Disease. American Journal of Agricultural Economics :./B0:..B9..=-.
2
Image: FreeDigitalPhotos.net
2-12
1pplication
Price of beef ($/pound)
Prior to discovery, consumers demand five millions pounds of beef per day at $3 per pound numbers are e!amples" Post#discovery, health concerns cause demand to shift in$ard, reducing %uantity demanded at $3 by one million pounds per day
3 Demand cur e after announcement of !"D
Demand cur e prior to announcement of !"D
Quantity of beef per day (millions of pounds) 2-13
2.2 Demand
Why do we treat price di erently(
..&rice is usually the most important actor in luencin" demand -.&rices in most markets can chan"e easily and o ten ;.&rice is the one actor o demand most likely to measurably impact the supply o a "ood, and there ore ties to"ether the two sides o the model
Cow to the supply side o the model
2-14
2.3 Supply
&rice 'um(er o" sellers &roduction costs /related to production technolo"y0 Sellers7 outside options
What actors in luence the supply o a "ood or ser%ice(
2-15
2.3 Supply
+i"ure -.B Supply o )omatoes
2-16
2.3 Supply
(dollars/pound)
6 5 4 3 2 1
2
#t prices below 1- per pound, suppliers ind it unpro itable to sell any oran"es4 this is known as the supply choke price #s the price increases beyond 1-, suppliers will pro%ide oran"es to the market Dust as with demand, we connect the obser%ed price5quantity combinations usin" a supply cur,e
We can describe the relationship between the quantity o oran"es supplied /in pounds0 and the price /12pound0 with aofsupply Price oranges cur,e
400
800
1,200 1,600
Quantity of oranges (pounds)
2-17
2.3 Supply
We can also describe the supply cur%e mathematically
2
QS = 400P 800
)he supply cur%e on the pre%ious slide is "i%en as where QS is the quantity o oran"es supplied /in pounds0 and P is the price o oran"es /12pound0 Since we plot price on the %ertical a6is, the in,erse supply cur,e is "i%en as P = 2 + 0.0025QS
2-18
2.3 Supply
When a actor a ectin" supply other than price chan"es, the result is a shift in the supply cur%e
Chan$e in +uantity supplied , a mo%ement along the supply cur%e in response to a price chan"e, with e%erythin" else held constant Chan$e in supply , a shi t o the entire supply cur%e caused by a chan"e in a non5price actor that a ects supply
2-19
2.3 Supply
+i"ure -.= Shi ts in the Supply Cur%e
2-20
1pplication
Solar panels and polysilicon Solar ener"y is o ten touted as a key in"redient in the uture o ener"y, but has historically been cost5prohibiti%e Aecently, prices or solar modules ha%e allen rapidly, pushin" the cost o solar power closer to ?"rid parity@
Erid parity means solar can compete with other sources o ener"y on a cost basis
Citation: Aoca, M and 8. Sills. Co%ember .9, -9... ?Solar Elut Worsens as Supply Sur"e Cuts &rices :;<: Commodities.@ Bloomberg News, www.bloomberg.com
Fne o the key reasons has to do with the cost o productionGthe price o polysilicon, a semiconductor that is the basis or most solar systems, dropped more than :9< between -99H and -9.. >ow can we describe this phenomenon usin"
2-21
1pplication
Price of solar capacity ($/$att)
Supply curve in 2008
2
In &''(, the cost of solar installation averaged $3 per $att) producers $ere $illing to supply *' mega$atts +," numbers are e!amples" -s suppliers of polysilicon e!pand capacity, the cost of this .ey input drops, shifting the supply of solar energy out
Supply curve in 2011
Producers are $illing to supply 3' +, in &'** at a price of $3 per $att
%0
#e$ solar capacity (mega$atts) Copyright 2013 Worth Publishers, All Rights Reserved Microeconomics Goolsbee/Levitt/ Syverso
30
1/e
2-22
2.4 Market .+uili(rium
Combinin" the descriptions o market supply and market demand completes the model
Aemember, supply and demand cur%es relate the price o a "ood to the +uantity demanded or supplied
)he point at which these two cur%es cross is called the market e+uili(rium
Market e+uili(rium , occurs when the price o a "ood results in the quantity demanded equal to the quantity supplied .+uili(rium price , the only price at which the quantity demanded equals the quantity supplied
2-23

QD = 2,400 400P , QS = 400P 800
)he market equilibrium can be identi ied mathematically. +or the oran"e e6ample: #t equilibrium, Qe = QD = QS /Qe is equilibrium quantity04 we sol%e or equilibrium price, Pe, by settin" supply equal to demand
2,400 400Pe = Qe = 400Pe 800

Combinin" terms containin" Pe yields
800Pe = 3200 , Pe = 4
)o ind Qe, substitute Pe = 4 into either equation, yieldin" Q = 800 Copyright 2013 Worth Publishers, All Rights Reserved Microeconomics Goolsbee/Levitt/ Syverso 1/e
2-24

Price of oranges (dollars/pound)
Eraphically, equilibrium can be ound by plottin" supply and demand to"ether

S
) 5 4 3 ( %
Demand and supply intersect at price o 1B.99 per pound o oran"es, resultin" in H99 pounds o oran"es bein" sold )his is the only price that can ?clear@ the market
>i"her prices: quantity supplied e6ceeds quantity demanded 'ower prices: quantity demanded e6ceeds quantity supplied
D
400
&00
%'(00 %')00 ('000 ('400
>ow do markets mo%e toward equilibrium( +irst, i P > Pe, quantity supplied will e6ceed quantity demanded
E6cess supply is re erred to as surplus )o sell their products, producers must lower prices #s prices all, quantity demanded increases and quantity supplied decreases until the market reaches equilibrium at a lower price
2-26

Describin" a surplus "raphically
Price of oranges (dollars/pound) *urplus ) 5 4 3 ( %
#t a price o 1=, .,-99 pounds are supplied, but only B99 are demanded )here is a surplus o H99 pounds )o reach equilibrium, prices must all, leadin" to a decrease in the quantity supplied, and an increase in the quantity demanded
D
0 400 &00 %'(00 %')00 ('000 ('400 Quantity of oranges (pounds) 2-27
'ikewise, if P < Pe, quantity demanded will e6ceed quantity supplied

E6cess demand is re erred to as shorta$e )he shorta"e will induce buyers to bid up the price #s prices rise, quantity demanded will all and quantity supplied will rise until the market reaches equilibrium at a hi"her price
2-28

Describin" a shorta"e "raphically
#t a price o 1;, B99 pounds are supplied, but .,-99 pounds are demanded )here is a shorta$e o H99 pounds )o reach equilibrium, prices must rise, leadin" to a decrease in the quantity demanded, and an increase in the quantity supplied
) 5 4 3 ( %
*+ortage
D
0 400 &00 %'(00 %')00 ('000 ('400 Quantity of oranges (pounds) 2-29
The Demand for Gym Memberships

)he supply and demand or monthly "ym memberships are "i%en as
Figure it out
QS = 10P 300 , QD = 600 10P

Where P is the monthly price, in dollars 1ns)er the "ollo)in$ +uestions% ..I the current price or memberships is 1=9 per month, is the market in equilibrium( -.Would you e6pect the price to rise, or all( ;.I so, by how much(
2-30

.. )wo ways to sol%e the problem

Figure it out
Compute quantity supplied and demanded at a price o 1=9, or Sol%e or the equilibrium price, and compare with 1=9
!sin" the irst method
QS = 10P 300 = 10(50) 300 = 200 QD = 600 10P = 600 10(50) = 100 QS > QD, and the market is not in equilibrium.
-. What must happen to price( &rice needs to all* but by how much( ;. Sol%e or equilibrium price and quantity
QS = QD = Q* => 10P* 300 = 600 10P* => P* , $45, Q* , %50 &rice must all by 85, and 59 more memberships are
2-31

Cumber o consumers Wealth or income Consumer tastes &rices o related "oods /complements or substitutes0
What happens to the market equilibrium when there is a shi t in demand or supply(
Aemember the actors that can shi t the demand cur%e
and the supply cur%e

Cumber o producers Costs o production &roducer outside options
2-32
+i"ure -.I Why Pe Is the Equilibrium &rice
2-33
In Danuary, -9.-, the +D# announced it had detected low le%els o carbendazim, a potentially dan"erous un"icide, in samples o oran"e Juice >ow will this announcement a ect the market or oran"es(
Supply side , the le%els detected were not su icient to induce action by +D#4 assume no impact on supply Demand side , bad press can ha%e ne"ati%e impacts on demand or ood products* what should happen(
2-34

We can describe this "raphically
) 5 4 3 ( %
&rior to the +D#Ks disco%ery, H99 pounds o oran"es are sold at 1B per pound # ter the announcement, demand shi ts rom D1 to D2 )he new equilibrium occurs when B99 pounds are sold at a price o 1; per pound )here has been a decrease in demand and a decrease in the +uantity o" oran$es supplied in response to a allin" price
D(
0 400 &00
D% Quantity of oranges (pounds)
%'(00 %')00 ('000 ('400
2-35
A Shift in Demand
Figure it out
Draw a supply and demand dia"ram o the market or "enerators in )ampa, +lorida 1ns)er the "ollo)in$ +uestions% ..Suppose a hurricane watch is issued, and some residents e6pect to lose power. !sin" the supply and demand dia"ram, show what will happen to the equilibrium price and quantity in the )ampa market or "enerators -.Does this chan"e re lect a chan"e in demand or a chan"e in the quantity demanded(
2-36
A Shift in Demand
Figure it out
)he initial equilibrium occurs at a price o P1 and quantity Q1
S
Price of generators (dollars)
When the hurricane watch is issued, demand shi ts outward )he new price is P2, and the new quantity is Q2
P2 P1
So, price and quantity e6chan"ed ha%e both increased

D( D%
Q1 Q2
)his represents a chan$e :or shi"t; in demand

Quantity of generators
2-37
In +ebruary, -9.., 8ra$il won a trade dispute with the !.S. re"ardin" imported oran"e Juice, indin" the !.S. was un airly e6cludin" 8ra$ilian suppliers rom !.S. markets by use o a tari )he result was more oran"e Juice imported rom 8ra$il >ow should this announcement a ect the market or oran"es( Demand side , this should not a ect demand Supply side , the rulin" applies to oran"e Juice, not oran"es* what is the di erence(
I applied to oran"es, more sellers , supply shi ts out #s it applies only to Juice, a ects outside opportunities o Copyright 2013 Worth Publishers, All Rights Reserved Microeconomics Syverso 1/e domestic oran"e producers* what Goolsbee/Levitt/ happens(
2-38

We can describe this "raphically
S%
S(
With the tari , H99 pounds o oran"es are sold at 1B per pound When the tari is repealed, domestic oran"e producers shi t product rom Juice processors to ruit markets, supply shi ts rom S1 to S2 Cew equilibrium: .,-99 pounds at 1; per pound )here has been an increase in supply and an increase in the +uantity o" oran$es demanded in response to a lower price
6 5 4 3 2 1
D
0 400 800 1,200 1,600 2,000 2,400
A Shift in Supply
Figure it out
)his summer, you noticed the price o lobster in your supermarket risin", but also that there was much more lobster bein" sold !sin" a supply and demand dia"ram, what can you in er about this market(
2-40
A Shift in Supply
Figure it out
)he initial equilibrium occurs at a price o P1 and quantity Q1 What chan"e in supply or demand would result in prices risin" and quantity e6chan"ed allin"(
S
Price of generators (dollars)
# ne"ati%e shi t in supplyL )he new price is P2, and the new quantity is Q2 )his represents a chan$e :or shi"t; in supply and a chan"e in the +uantity demanded
P2 P1
D
Q2 Q1
Quantity of generators
2-41

Eoin" back to the pre%ious e6ample o "ym memberships
Figure it out
QS = 10P 300 , QD = 600 10P

Cow, suppose the town opens a new community center with a pool and a wei"ht room. #s a result, consumers demand -99 ewer "ym memberships at e%ery price 1ns)er the "ollo)in$ +uestions% ..Write down the new demand equation -.What do you e6pect to happen to the equilibrium price and quantity /remember, pre%iously P* , $45, Q* , %50"/ ;.Compute the new equilibrium price and quantity.
2-42
Figure it out
2-43
Summary o the e ect o a shi t in supply or demand on market equilibrium
2-44

)wo important parameters
Si<e o" the shi"t Slope o" the cur,es
What determines the ma"nitude o the chan"e in equilibrium price and quantity(
I demand shi ts, the slope o the supply curve determines si$e o chan"es to equilibrium price and quantity, and %ice %ersa )he si$e o the chan"e in price is inversely related to the si$e o the chan"e in quantity
2-45

Price S% S(
Consider an outward shi t in supply /increase0

Demand has relati,ely steep slope% shi t in supply results in large chan"e in price and small chan"e in quantity e6chan"ed Demand has relati,ely shallo) slope% the same shi t in supply results in small chan"e in price and large chan"e in quantity e6chan"ed
D
-P -P
D
0 -Q -Q
Quantity
2-46
+i"ure -... Si$e o Equilibrium &rice and Muantity Chan"es, and the Slopes o the Supply and Demand Cur%es
2-47
Sometimes, supply and demand shi t simultaneously 5urricane =atrina and the 'e) Orleans housin$ market
Natrina destroyed many homes* what happens to supply( )he hurricane displaced thousands o residents, many ha%e not returned* what happens to demand( >ow will these shi ts a ect the housin" market equilibrium in Cew Frleans(
2-48

Price
>urricane Natrina and the Cew Frleans housin" market

S2 S1 )he hurricane shi ts supply and demand inward. )he result is a lar"e drop in quantity, and a small drop in price >owe%er, without speci ic in ormation on shi ts and slopes o supply and demand, we cannot know or sure what happens to price D2
0
P P
D2
D1
Quantity
E6ample: Consider smaller demand shi t4 quantity still alls, but price has risen sli"htlyL
Q Q
2-49
2.5 .lasticity
)he slopes o the supply and demand cur%es determine how markets respond to shi ts in supply and demand
Steep cur,es% large chan"es in price and small chan"es in quantity, all else equal Shallo) cur,es% small chan"es in price and large chan"es in quantity, all else equal
2-50
2.5 .lasticity
.lasticity !nit5less measure that describes the sensiti%ity o quantity demanded or supplied &ercenta"e chan"e in one %ariable /e."., quantity0 di%ided by the percenta"e chan"e in another /e."., price0
2-51
2.5 .lasticity
!Q E = !P
D
&rice elasticity o" demand% percenta"e chan"e in quantity demanded di%ided by percent chan"e in D price
&rice elasticity o" supply: percenta"e chan"e in quantity supplied di%ided by percent chan"e in price S
!Q E = !P
S
2-52
2.5 .lasticity
When price elasticity o demand is hi$h*
Aelati%ely small increases in price result in relati%ely lar"e drops in quantity demanded E6amples( McDonaldKs hambur"ers
When price elasticity o demand is lo)*

Aelati%ely lar"e increases in price result in relati%ely small drops in quantity demanded E6amples( Easoline
2-53
2.5 .lasticity
)he a,aila(ility o" close su(stitutes /readth o the market 0ype o" product /e."., necessity or lu6ury item0 &ercenta$e o" income spent on the "ood 0ime hori<on o the analysis
What %ariables a ect the elasticity o demand(
What %ariables a ect the elasticity o supply(

)he ease at which production capacity can be e6panded 0ime hori<on o the analysis
2-54
2.5 .lasticity
)erminolo"y
.lastic% Demand is elastic i .ED. / % >nit elastic% Demand is unit elastic i .ED. , % Inelastic% Demand is inelastic i 0 0 .ED. 0 % &er"ectly elastic% Demand is per ectly elastic i .ED. , 1 &er"ectly inelastic% Demand is per ectly inelastic i .ED. , 9
Important% Elasticities do not ha%e units attached4 can be compared across di erent "oods and ser%ices in di erent markets, and also used to describe supply
2-55
1pplication
0he price o" $as and tra""ic con$estion 8ur"er and Na ine /-99:0 in%esti"ate "as prices, hi"hway speed, and con"estion in 'os #n"eles between -99. and -993 In theory, hi"her "asoline prices should reduce hi"hway speeds because dri%in" slowly tends to increase e iciency )he authors ind dri%ers do not slow down when tra ic is li"ht4 howe%er, durin" rush hour, a%era"e speeds actually increase /about ;.; miles per hour or e%ery 1..992"allon0 )hey attribute this to reduced con"estion4 dri%ers respond to hi"h prices by takin" ewer trips, or usin" public transportation
Citation: 8ur"er, C.E. and D.). Na ine. -99:. ?Eas &rices, )ra ic, and +reeway Speeds in 'os #n"eles.@ he !eview of Economics and "tatistics :./;0: 3=-53=I
2
#ccountin" or the relationship between %ehicle miles tra%elled /7M)0 and con"estion, the authors estimate the Copyright 2013 Worth Publishers, All Rights Reserved Microeconomics Goolsbee/Levitt/ Syverso price elasticity o demand or 7M) to be appro6imately
1/e
2-56
2.5 .lasticity
.lasticities and linear demand and supply
Equation or price elasticity /demand or supply0
2
Q /Q or, E= P / P
We o ten assume demand and supply are linear, so knowin" how to calculate elasticity on a linear cur%e is important
!Q E= !P
Mo%in" up or down a linear supply or demand cur%e, the ratio Q/P is equal to 1/slope
Q / Q Q P 1 P E= = = P / P P Q slope Q
2-57
2.5 .lasticity
&rice elasticity o" demand "or a linear demand cur,e
2
-t the top of our demand curve, 1 P " ED = D = #00 = perfectly elastic" slope Q 0 # E D = #00 = 2 elastic" $00 3 E D = #00 = 1 1, 200 unit elastic"
E D = #00 E D = #00
inelastic"
6 5 4 3 2 1
2 = 0%& 1, "00 0 =0 2, #00
inelastic" perfectly
400
800
1,200 1,600 2,000 2,400 Quantity of oranges (pounds) 2-58
2.5 .lasticity
D Q P D E = D P Q
#s you mo%e down a demand cur%e, demand becomes less elastic, e%entually per ectly inelastic at the hori$ontal a6is
0lope is constant along the demand curve
P/Q falls as you move do$n the

demand curve
2-59
2.5 .lasticity
&rice elasticity o" supply "or a linear supply cur,e
6 5 4 3 2 1
2
E S = #00 " = 1%& 1, "00 & = 1%"' 1, 200
elastic" elastic" elastic" elastic"
E S = #00
E S = #00
# =2 $00 3 =3 #00
E S = #00
-t the bottom of the supply curve,
ES =
400 800 1,200 1,600
1 P 2 S = #00 = slope Q 0
perfectly elastic"
Quantity of oranges (pounds)
2-60
The Elasticity of Demand for Movie Tickets
Figure it out
)he demand or mo%ie tickets in a small town is "i%en as
QD = 1,000 50P
1ns)er the "ollo)in$ +uestions% ..Calculate the price elasticity o demand when the price o tickets is 1= -.Calculate the price elasticity o demand when the price o tickets is 1.;.#t what price is the price elasticity o demand unit elastic! B.What happens to the price elasticity o demand as you mo%e down a linear demand cur%e(
2-61
Figure it out
.. )he price elasticity o demand is "i%en as Q D / Q D Q D P D E = = D P / P P Q
Q D = &0 #t 1=, P
is constant /linear demand cur%e0

P & 1 = = Q D 1000 &0 )&( 1&0
#t a price o 1=,
D
)here ore,
Q D P 1 E = D = &0 = 0%33333 P Q 1&0
#nd, demand is
Inelastic
2-62
Figure it out
P 12 3 = = Q D 1, 000 &0 )12( 100

D Q P 3 ED = D = &0 = 1%& P Q 100
2-63
The Elasticity of Demand for Movie Tickets ;. #t what price is demand unit elastic(
/!nit elastic implies ED = ,10
Figure it out
)o sol%e or the correct price, use the equation or elasticity o demand P 1 = &0 1, 000 &0 P Multiply both sides by 1,000 , 50P
&0 P 1, 000 = &0 P

#nd combine terms, yieldin" a price o P = 1.9 B. What happens to the elasticity o demand as you mo%e down a linear demand cur%e(
Demand becomes less elastic

2-64
2.5 .lasticity
&er"ectly inelastic demand and supply
Implies quantity demanded2supplied does not chan"e in response to a chan"e in price E6ample: li e5sa%in" dru"s /near5per ectly inelastic demand0
&er"ectly elastic demand and supply

Implies the quantity demanded2supplied is infinitely responsi%e to miniscule chan"es in price E6ample: Commodity crops /near5per ectly elastic demand0
2-65
2.5 .lasticity
Price
2
When is demand2supply per ectly inelastic /E = 00( When P = 0 /hori$ontal a6is0
When the slope o demand2supply is in inite
1 P E= slope Q
E=
1 P =0 Q
1 P E= = 0 Q
0 Quantity
When is demand2supply per ectly elastic /E = 0( When Q = 0 /%ertical a6is0

When the slope o demand2supply is $ero
2-66
2.5 .lasticity
Demand elasticity a ects consumer e6penditures or products Ae%enue O P Q ED is the ratio o the percenta"e chan"e in quantity
demanded to the percenta"e chan"e in price. I demand is inelastic, a .< increase in price reduces demand by less than .<... total e6penditures rise I demand is elastic, a .< increase in price reduces demand by more than .<... total e6penditures fall )his in ormation can be use ul or producers who are able to manipulate market supply /more on this in Chapter :0
2-67
2.5 .lasticity
Price of oranges (dollars/pound) 6 5 4 3 2 1 2,000 !"#$l e%pen&i#ure' = #"#$l revenue = P Q (ni# el$'#ic 3,600 3,200
400
800
1,200 1,600 2,000 2,400 Quantity of 0 oranges (pounds)
400
800
1,200 1,600 2,000 2,400 Quantity of oranges (pounds)
2-68
2.5 .lasticity
!Q Q / Q E = = !I I / I
D I D D D
2-69
2.5 .lasticity
+i"ure -..: E6penditures alon" a 'inear Demand Cur%e
2-70
2.5 .lasticity
D E XY D D D !QX QX / QX = = !PY PY / PY
2-71
1pplication
Citation: Eallet, C.#. and D.#. 'ist. .::H. ?Elasticities o 8eer Demand Ae%isited.@ Economics #etters 3.: 3I5I.
2-72
1pplication
What mi"ht e6plain chan"es in elasticities o%er time( Consumer tastes% release o in ormation re"ardin" ne"ati%e health e ects be"innin" in the .:I9s may ha%e led to reduced demand Increased proportion o drinkers who are less health conscious and2or addicti%e in nature E%idence su""ests hea%y drinkers are less price5 sensiti%e to alcohol, hence the chan"e to inelastic &oorer consumers are "enerally ha%e less education and are less health conscious, hence the mo%e to an in erior "ood Chan"e in beer5wine relationship rom substitutes to unrelated "oods perhaps due to increased product di erentiation /e."., microbreweries, lite beers0 in the beer industry
Citation: Eallet, C.#. and D.#. 'ist. .::H. ?Elasticities o 8eer Demand Ae%isited.@ Economics #etters 3.: 3I5I.
2-73
2.6 Conclusion
2-74

GLS1e - Chapter2 Goolsbee Levitt Economics

Uploaded by

Document Information

Original Title

Copyright

Available Formats

Share this document

Share or Embed Document

Sharing Options

Did you find this document useful?

Is this content inappropriate?

Copyright:

Available Formats

GLS1e - Chapter2 Goolsbee Levitt Economics

Uploaded by

Copyright:

Available Formats

Supply and Demand

2.1 Markets and Models

2.1 Markets and Models

What actors in luence the demand or a "ood or ser%ice(

1,200 1,600 2,000 2,400

What about the other actors that in luence demand(

+i"ure -.- Shi ts in the Demand Cur%e

3 Demand cur e after announcement of !"D

Demand cur e prior to announcement of !"D

Quantity of beef per day (millions of pounds) 2-13

Cow to the supply side o the model

What actors in luence the supply o a "ood or ser%ice(

Quantity of oranges (pounds)

Supply curve in 2011

Producers are $illing to supply 3' +, in &'** at a price of $3 per $att

2.4 Market .+uili(rium

2.4 Market .+uili(rium

2,400 400Pe = Qe = 400Pe 800

2.4 Market .+uili(rium

Eraphically, equilibrium can be ound by plottin" supply and demand to"ether

%'(00 %')00 ('000 ('400

Quantity of oranges (pounds) 2-25

2.4 Market .+uili(rium

2.4 Market .+uili(rium

2.4 Market .+uili(rium

'ikewise, if P < Pe, quantity demanded will e6ceed quantity supplied

2.4 Market .+uili(rium

The Demand for Gym Memberships

QS = 10P 300 , QD = 600 10P

The Demand for Gym Memberships

!sin" the irst method

2.4 Market .+uili(rium

and the supply cur%e

2.4 Market .+uili(rium

+i"ure -.I Why Pe Is the Equilibrium &rice

2.4 Market .+uili(rium

2.4 Market .+uili(rium

D% Quantity of oranges (pounds)

%'(00 %')00 ('000 ('400

Price of generators (dollars)

So, price and quantity e6chan"ed ha%e both increased

)his represents a chan$e :or shi"t; in demand

2.4 Market .+uili(rium

2.4 Market .+uili(rium

Price of generators (dollars)

The Demand for Gym Memberships

QS = 10P 300 , QD = 600 10P

The Demand for Gym Memberships

2.4 Market .+uili(rium

Summary o the e ect o a shi t in supply or demand on market equilibrium

2.4 Market .+uili(rium

2.4 Market .+uili(rium

Consider an outward shi t in supply /increase0

2.4 Market .+uili(rium

2.4 Market .+uili(rium

2.4 Market .+uili(rium

>urricane Natrina and the Cew Frleans housin" market

When price elasticity o demand is lo)*

What %ariables a ect the elasticity o demand(

What %ariables a ect the elasticity o supply(

2 = 0%& 1, "00 0 =0 2, #00

1,200 1,600 2,000 2,400 Quantity of oranges (pounds) 2-58

0lope is constant along the demand curve