Economics 2150A/B Lecture Notes - Lecture 2: Corn Syrup, Net Impact, Demand Curve
Uyu6yt\Econ 2150
Chapter 2 Textbook Notes
Sept. 18 2017
Chapter 2: Demand and Supply Analysis
• Model of perfet opetitio ko as a odel of prie takig ehaiour eause the
trasatio of eer idiidual uer/seller is so sall the eah take the arket prie
as given when making decisions
Demand Curves
• Tells us Q buyers are willing to purchase at different prices
• Derived demand = it is derived from the production & sale of other goods
o Eg) high-fructose corn syrup demand incr. when demand for pop incr.
(intermediate good)
• Direct demand = demand for the good itself
• Demand curve tells us highest price the market will bear for a given Q or supply of
output
• Factors that affect QD:
o Prices of related goods
o Consumer incomes
o Consumer tastes
o Advertising
▪ Imagine all these factors are fixed when we draw demand curve
• Slopes downward → the lower the price, the greater QD
• Law of demand = inverse relationship between price and QD
Supply Curves
• Tells us Q suppliers are willing to sell at different prices
• Constructed from the sum of supply curves of all individual suppliers
• Slopes upward → the higher the price, the more suppliers are willing to offer
• Law of supply = positive relationship between price and QS
• Factors that affect QS:
o Prices of factors of production
o Prices of other goods that sellers produce
Market Equilibrium
• Where demand and supply curves intersect
• At any other price, pressures exist for price to change
• Excess supply = QS > QD
• Excess demand = QD> QS
Shifts in Supply and Demand
• To do a comparative statics analysis, determine how an exogenous variable affects D or
S
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• Represent this change by shifting in either curve
• Shifts will change equilibrium
• Incr. D + no change S = higher equilibrium P and Q
• Decr. In D + no change S = lower equilibrium P and Q
• Incr. S + no change D = lower equilibrium P and higher equilibrium Q
• Decr. S + no change D = higher equilibrium P and smaller equilibrium Q
Shifts in BOTH Supply and Demand
• Net impact on equilibrium depends on the magnitude of each shift as well as the shapes
of the curves
Price Elasticity of Demand
• Measures the sensitivity of QD to price
• Denoted Q,P
• % change in QD brought about by a 1% change in price
Q,P = % ∆ Q / % ∆P ………..or………. = ∆Q/∆P P/Q
• elasticity = 0 → perfectly inelastic demand
o QD is completely insensitive to price
• elasticity between 1 and -1 → inelastic demand
o QD is relatively insensitive to price
• Elasticity = -1 → unitary elastic demand
o % incr. in QD equals % decrease in price
• Elasticity is between -1 and - → elastic demand
o QD is relatively sensitive to price
• Elasticity = - → perfectly elastic demand
o Any increase in price results in QD decreasing to 0
o Any decrease in price results in QD increasing to infinity
• For any 2 demand curves that cross at a particular point, the flatter of the 2 curves is
more elastic at the point where they cross
• Price elasticity of demand is important for:
o Deciding how to price products
o Determining structure and nature of competition within industries
o Determining effect of various kinds of gov. interventions
Elasticities Along Specific Demand Curves
Linear Demand Curves
• Represented by = −
o A and b are positive constants
• a embodies effects of all the factors other than price that affect demand
• b reflects how the price of the good affects the QD
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Document Summary
Imagine all these factors are fixed when we draw demand curve: slopes downward the lower the price, the greater qd, law of demand = inverse relationship between price and qd. Market equilibrium: where demand and supply curves intersect, at any other price, pressures exist for price to change, excess supply = qs > qd, excess demand = qd> qs. Shifts in supply and demand: to do a comparative statics analysis, determine how an exogenous variable affects d or. D + no change s = higher equilibrium p and q: represent this change by shifting in either curve, shifts will change equilibrium, decr. In d + no change s = lower equilibrium p and q: decr. S + no change d = higher equilibrium p and smaller equilibrium q. S + no change d = lower equilibrium p and higher equilibrium q.