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Chapter 2

Chapter 2

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Queen's University
ECON 212
Arthur E Stewart

Chapter 2: Demand and Supply Analysis Demand, Supply, and Market Equilibrium  Applying equilibrium and comparative statics for the analysis of perfectly competitive markets – i.e. markets that have a large # of buyers and sellers o The transactions of any individual buyer/seller that they have no effect on the market price  price takers  A market can be characterized along three dimensions o Commodity – the product bought and sold o Geography – the location in which purchases are being made o Time – The period of time in which transactions are occurring Demand Curves  A curve that shows the quantity of goods that consumers are willing to buy at diff prices  Derived Demand is demand for a good that is derived from the production and sale of other goods  demand for high-fructose corn syrup comes from demand for soft drinks  Direct Demand: Comes from the desire of buyers to directly consumer the good itself  Other factors besides price determine demand  the price of related goods, incomes, consumer tastes/trends, advertising but D curve only focuses on price and quantity  Law of Demand is the inverse relationship between price and quantity sold and all other factors influencing demand are fixed  price goes up, quantity demanded goes down Supply Curves  A curve that shows the quantity of goods that their suppliers are willing to sell at different prices  depends on what can be made this year and leftovers from the past year o Slopes upward  suppliers are willing to offer more at higher prices than at lower prices; this positive relationship is known as the Law of Supply  Factors of production are resources such as capital, equipment, and labour that are used to produce a good  limitations also affect the quantity producers can supply Market Equilibrium  This is the point where the total quantity demanded=total quantity supplied o Determines the market price in which the good would be sold at  Excess Supply is the situation in which total quantity supplied at a given price exceeds total demand that that price (price above equilibrium)  Excess Demand is the situation in which total quantity supplied at a given price is lower than the demand at that price (price below equilibrium) Shifts in Supply and Demand Shifts in Either Supply or Demand  In reality, factors that affect supply and demand are not fixed  this causes shifts in the demand and/or supply curves  An increase in supply + unchanged demand = lower price & higher quantity  An decrease in supply + unchanged demand = higher price & lower quantity  An increase in demand + unchanged supply = higher price & higher quantity  An decrease in demand + unchanged supply = lower price & lower quantity Shifts in Both Supply & Demand  Depending on how big the demand and supply shifts are, the equilibrium price and quantity will be different  must determine the size of the shifts* o Any of the above outcomes will happen depending on which shift is bigger o Also possible to have different price with the same quantity Price Elasticity of Demand  Measures the sensitivity of the quantity demanded to price o It is the percentage change of the quantity demanded with respect to price holding all other determinants constant o where, o Or  If , perfectly inelastic  quantity demanded is completely insensitive to price  If , inelastic demand  quantity demanded is relatively insensitive to price  If , unitary elastic demand  % increase in demand = % decrease in price  If , elastic demand  quantity demanded is relatively sensitive to price  If , perfectly elastic  quantity demanded is perfectly sensitive to price Elasticities Along Specific Demand Curves Linear Demand Curve  Represented in the equation where a = the effects of all factors (other than price) that affect the demand for the good; b reflects how the price of any good affects the quantity demanded o The inverse function in terms of P is: o The term is also called the Choke price – the price at which the quantity demanded falls to zero   this tells us
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