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MGEB02H3 (34)
A.Mazaheri (18)
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Week 2 chapter notes

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Department
Economics for Management Studies
Course Code
MGEB02H3
Professor
A.Mazaheri

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Chapter 2 The Basics of Supply and Demand Notes
x supply-demand analysis is fundamental and powerful tool that can be applied to variety of interesting and important problems
x to name a few:
o understanding and predicting how changing world economic conditions affect market price and production
o evaluating the impact of government price controls, minimum wages, price supports, and production incentives
o determining how taxes, subsidies, tariffs, and import quotas affect consumers and producers
x without government intervention, supply and demand will come into equilibrium to determine both the market price of a good
and the total quantity produced, which depends on the particular characteristics of supply and demand
x variations of price and quantity over time depend on the ways in which supply and demand respond to other economic variables,
such as aggregate economic activity and labour costs, which are themselves changing
2.1 Supply and Demand
The Supply Curve
x supply curve Æ relationship between the quantity of a good that producers are willing to sell and the price of the good
x vertical axis shows price of good, P, measured in dollars per unit, which is price that sellers receive for a given quantity supplied
x horizontal axis shows the total quantity supplied, Q, measured in the number of units per period
x the supply curve is thus a relationship between the quantity supplied and the price
x the higher the price, the more that firms are able and willing to produce and sell
x quantity can depend on other variables, such as on production costs, including wages, interest charges, and costs of raw materials
x when production costs decrease, output increases no matter what the market price happens to be and the supply curve shifts right
The Demand Curve
x demand curve Æ relationship between the quantity of a good that consumers are willing to buy and the price of the good
x the demand curve slopes downward: consumers are usually ready to buy more if the price is lower
x the quantity of a good that consumers are wiling to buy can depend on price and income
x a lower price may encourage consumers who have already been buying the good to consume larger quantities or it may allow
consumers who were previously unable to afford the good to begin buying it
x with greater incomes, consumers can spend more money on any good, and some consumers will do so for most goods
x changes in the prices of related goods also affect demand
x substitutes Æ two goods for which an increase in the price of one leads to an increase in the quantity demanded of the other
x complements Æ two goods for which an increase in the price of one leads to a decrease in the quantity demanded of the other
2.2 The Market Mechanism
x the next step is to put the supply curve and demand curve together
x the vertical axis shows the price of a good, P, measured in dollars per unit, which is now the price that sellers receive for a given
quantity supplied, and the price that buyers will pay for a given quantity demanded
x the horizontal axis shows the total quantity demanded and supplied, Q, measured in number of units per period
x equilibrium (or market-clearing) price Æ price that equates the quantity supplied to the quantity demanded
x market mechanism Æ tendency in a free market for price to change until the market clears
x at this point, because there is neither excess demand nor excess supply, there is no pressure for the price to change further
x supply and demand might now always be in equilibrium, and markets might not clear quickly when conditions change suddenly
x surplus Æ situation in which the quantity supplied exceeds the quantity demanded
x to sell this surplus—or at least to prevent it from growing—producers would begin to lower prices
x as prices fell, quantity demanded would increase, and quantity supplied would decrease until the equilibrium price was reached
x shortage Æ situation in which the quantity demanded exceeds the quantity supplied
x this would put upward pressure on price as consumers tried to outbid one another for existing supplies and producers reacted by
increasing price and expanding output, eventually leading the price to reach equilibrium
2.3 Changes in Market Equilibrium
x lower costs result in lower prices and increased sales; indeed, gradual decreases in costs resulting from technological progress
and better management are an important driving force behind economic growth
x in most markets, both the demand and supply curves shift from time to time
x consumers’ disposable incomes changes as the economy grows (or contract, during economic recessions)
x the demands for some goods shift with the seasons, with changes in the prices of related goods, or simply with changing tastes
x wage rates, capital costs, and the prices of raw materials also change from time to time, and these changes shift the supply curve
x price and quantity will change depending both on how much the supply and demand curves shift and on shape of those curves
2.4 Elasticities of Supply and Demand
x elasticity Æ percentage change in one variable resulting from a 1% increase in another
x price elasticity of demand Æ percentage change in quantity demanded of a good resulting from a 1% increase in its price
x EP = (%ûQ) / (%ûP) = (ûQ / Q) / (ûP / P) = (P / Q) × (ûQ / ûP)
x the percentage change in a variable is just the absolute change in the variable divided by the original level of the variable
x the EP is usually a negative number—when the price of a good increases, the quantity demand usually falls
x thus ûQ / ûP (the change in quantity for a change in price) is negative, as is EP
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Description
Chapter 2 The Basics of Supply and Demand Notes N supply-demand analysis is fundamental and powerful tool that can be applied to variety of interesting and important problems N to name a few: o understanding and predicting how changing world economic conditions affect market price and production o evaluating the impact of government price controls, minimum wages, price supports, and production incentives o determining how taxes, subsidies, tariffs, and import quotas affect consumers and producers N without government intervention, supply and demand will come into equilibrium to determine both the market price of a good and the total quantity produced, which depends on the particular characteristics of supply and demand N variations of price and quantity over time depend on the ways in which supply and demand respond to other economic variables, such as aggregate economic activity and labour costs, which are themselves changing 2.1 Supply and Demand The Supply Curve N supply curve relationship between the quantity of a good that producers are willing to sell and the price of the good N vertical axis shows price of good, P, measured in dollars per unit, which is price that sellers receive for a given quantity supplied N horizontal axis shows the total quantity supplied, Q, measured in the number of units per period N the supply curve is thus a relationship between the quantity supplied and the price N the higher the price, the more that firms are able and willing to produce and sell N quantity can depend on other variables, such as on production costs, including wages, interest charges, and costs of raw materials N when production costs decrease, output increases no matter what the market price happens to be and the supply curve shifts right The Demand Curve N demand curve relationship between the quantity of a good that consumers are willing to buy and the price of the good N the demand curve slopes downward: consumers are usually ready to buy more if the price is lower N the quantity of a good that consumers are wiling to buy can depend on price and income N a lower price may encourage consumers who have already been buying the good to consume larger quantities or it may allow consumers who were previously unable to afford the good to begin buying it N with greater incomes, consumers can spend more money on any good, and some consumers will do so for most goods N changes in the prices of related goods also affect demand N substitutes two goods for which an increase in the price of one leads to an increase in the quantity demanded of the other N complements two goods for which an increase in the price of one leads to a decrease in the quantity demanded of the other 2.2 The Market Mechanism N the next step is to put the supply curve and demand curve together N the vertical axis shows
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