Demand and Supply

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Department
Economics
Course
ECO101H1
Professor
Gustavo Indart
Semester
Summer

Description
Demand  and  Supply     Knowledge  Summary:   • Demand  is  usually  downward  sloping  and  Supply  upward  sloping   • Intersection  of  Demand  and  Supply  curves  is  the  equilibrium  point   • Change  in  quantity  demanded/quantity  supplied  are  movements  along  the   demand/supply  curve  and  change  in  the  demand/supply  is  a  shift  of  the   demand/supply  curve.   • The  Demand/Supply  Curve  is  the  sum  of  Individual  demand/supply  of  the   product.   • Factors  that  shift  demand:   1. Taxes/Subsidies.   2. Change  in  Prices  of  related  goods  (Substitutes/Complimentary  Goods)   3. Change  in  Income   4. Change  in  Preferences   • Factors  That  Shift  Supply   1. Prices  of  Inputs  (As  prices  rise,  Supply  falls)   2. No.  of  Firms  (As  firms  rise,  Supply  Rises)   3. Technology  (  A  new  breakthrough  increases  supply)   4. Taxes/Subsidies   • Consumer  Surplus:  The  value  of  the  goods  to  the  consumer  above  and  beyond   the  market  price  (Area  below  demand  curve  and  above  price).   • Producer  Surplus:  The  Difference  in  the  amount  that  a  producer  actually   receives  for  a  product  and  what  they  are  willing  to  receive  for  it  (Area  above   supply  curve  and  below  price).     Summary  of  Questions  to  be  Asked:     1. Plot  the  Demand/Supply  of  a  Good:   -­‐Sum  up  the  Individual  Demand/Supply  at  Various  Prices.   -­‐Plot  the  new  data  as  the  Demand/Supply  curve     2. Find  Changes  in  the  Equilibrium  Quantity  and  Price:   -­‐ Locate  the  original  equilibrium  point  ‘e1’  (Intersection  of  original  demand   and  supply  curves).   -­‐ Locate  the  new  equilibrium  ’e2’  (Intersection  of  demand  and  supply  after  a   proposed  change).   -­‐ Find  the  difference  between  the  Quantity  and  Price  of  the  two  points   (e1-­‐e2).     3. Find  New  Demand  Curve  after:   i) Tax/Subsidy   -­‐  Tax/Subsidy  causes  a  upward/downward  shift  in  the  demand  by  the   amount  of  the  tax  /subsidy.  (Note:  Shift  is  vertically  calculated)     ii) Change  in  Price  of  Related  Goods.                 -­‐  Complimentary  goods:  Goods  that  complement  each  other.                   (e.g  gasoline  and  cars)                   -­‐  If  the  Price  of  a  Complimentary  goods  Rises/Falls  the  demand  of  the                 Product  Falls/Rises.       -­‐Substitute  Goods:  Goods  that  may  substitute  each  other.         (e.g  houses  and  apartments)         -­‐If  the  Price  of  a  Substitute  Good  Falls/Rises  the  Demand  of  the  Product          Falls/Rises.       iii) Change  in  Income:   -­‐If  income  Rises/Falls,  Demand  Rises/Falls.     4. Find  the  new  Supply  Curve  After:   i) Tax/Subsidy   -­‐  Tax/Subsidy  causes  a  downward/upward  shift  in  the  Supply  by  the   amount  of  the  tax  /subsidy.  (Note:  Shift  is  vertically  calculated)     5. Find  the  Consumer  and  Producer  Surplus   i) For  Consumer  Surplus  (CS),  find  the  area  of  the  triangle  that  forms   between  the  demand  curve,  the  equilibrium  point  and  the  price.     -­‐ Note:  When  Price  Elasticity  of  Demand  (PED)  is  infinite,  CS=0.         When  PED  =0,  CS  is  infinite.  When  PES=0/infinite,  CS=0/Infinite     ii) For  Produce  Surplus  (PS),  find  the  area  of  the  triangle  that  forms   between  the  Supply  curve,  the  equilibrium  point  and  the  price.     -­‐ Note:  When  Price  Elasticity  of  Demand  (PED)  is  infinite,  PS  is  infinite.         When  PED  =0,  PS=0.  When  PES=0/infinite,  PS=Infinite/0         Exam  Questions:   2011  Term  Test  1  Furlong           2011 Short Answer Q1. Wil
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