Download Supply and Demand Curves

Chapter 3. Applying the Supply and
Demand Model
Supply and Demand
Curves
How shapes of demand curves
matter
Sensitivity of quantity demanded to
price
• Importance of sensitivity of quantity
demanded to price
• Price elasticity of demand
– Percentage change in the quantity demanded
in response to a given percentage change in
the price

Percentage change in quantity demanded Q / Q

Percentage changein price
p / p

Q / Q Q p

p / p p Q
Price elasticity of demand

Q / Q Q p

p / p p Q
Q  a  bp

Q / Q
p
b
p / p
Q
Q  286  20 p, given p 3.3and Q  220
b
p
3.30
 20 
 0.3
Q
220
• 1% increase in price of pork leads to 0.3% decrease in the quantity
demanded
– A price increase causes a less than proportionate fall in the
quantity of pork demanded
Elasticity along the demand curve
Constant-elasticity demand curves
Quiz #2
1. Draw supply curve for the supply function for the processed pork,
Q=88+40p (or P=1/40Q-88/40), Find two points on x and y axis (when p=0,
Q=?; when Q=0, p=?) and connect the two points
2. What happens to the supply curve for the processed pork if hog price
increases?
•
Using a linear downward-sloping demand curve and a linear upward-sloping
supply curve for gasoline:
3. Illustrate the effect of reduction of supply of crude oil in the gasoline market
(Graph new supply curve, find new equilibrium point, and explain).
4. If the government issues price ceiling at the original price before the
reduction of supply of crude oil, illustrate the effect on the graph and
explain.
•
The price elasticity of demand for gasoline is estimated to be -0.2. Two
gallons are sold daily at a price of $1. Use this information to obtain a
demand equation for gasoline, assuming it is linear(In other words, calculate
a & b in Q  a  bp ). To calculate a & b,
5. Write mathematical expression for the price elasticity of demand.
6. Using the elasticity expression and given information in the question above,
calculate ‘b’ first.
7. Using the demand equation, Q  a  bp and ‘b’, calculate ‘a’.
Quiz #2
1. Draw supply curve for the supply function for the processed pork,
Q=88+40p (or P=1/40Q-88/40), Find two points on x and y axis (when p=0,
Q=?; when Q=0, p=?) and connect the two points
Answer)
2. What happens to the supply curve for the processed pork if hog price
increases?
Answer)
•
Using a linear downward-sloping demand curve and a linear upward-sloping
supply curve for gasoline:
3. Illustrate the effect of reduction of supply of crude oil in the gasoline market
(Graph new supply curve, find new equilibrium point, and explain).
Answer: The supply curve for the gasoline shifts from S1 to S2. Without
governmental intervention, new equilibrium from e1 to e2 will be achieved
and equilibrium quantity will be down and the equilibrium price will be up to
p2.
4. If the government issues price ceiling at the original price before the
reduction of supply of crude oil, illustrate the effect on the graph and
explain.
Answer: Government prohibited gasoline price greater than pbar. So, at the
pbar, supply will be at Qs and demand will be at Qd. As a result, there
would be Qd-Qs, excess demand. With excess demand, the price goes up
normally because consumers are willing to pay more to get gasoline.
However, at the price is arbitrarily controlled at pbar. Gas station can’t sell
the gasoline more than pbar, causing the excess demand continues. We
call this shortage of gasoline, a persistent excess demand. At this
circumstance, suppliers would make decision who gets gasoline, eg.,
friends, old customers, and others do not.
The price elasticity of demand for gasoline is estimated to be -0.2. Two gallons
are sold daily at a price of $1. Use this information to obtain a demand
Q  a  bp a & b in
equation for gasoline, assuming it is linear(In other words, calculate
). To calculate a & b,
5. Write mathematical expression for the price elasticity of demand.
6. Using the elasticity expression and given information in the question above,
calculate ‘b’ first.
Q  a  bp
7. Using the demand equation,
and ‘b’, calculate ‘a’.
Answer)
5.
6.
7.