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Market Forces: Demand And
Supply
Demand
• Market demand curve:
a curve indicating the total quantity of a
good all consumers are willing and able to
purchase at each possible price, holding
the price of related goods, income,
advertising, and other variables constant.
Demand (continued)
• Change in quantity demanded:
changes in the price of a good lead to a
change in the quantity demanded of that
good. This corresponds to a movement
along a given demand curve.
Demand (continued)
• Change in demand:
changes in variables other than the price
of a good, such as income or price of
another good, lead to a change in
demand. This corresponds to a shift of
entire demand curve.
Demand Shifter:
Because:
- Income,
- Prices of related goods,
- Advertising and consumer tastes,
- Population,
- Consumer expectations.
Demand Shifter (continued):
Income:
- Normal good:
a good for which an increase (decrease) in
income leads to an increase (decrease) in the
demand for that good.
- Inferior good:
a good for which an increase (decrease) in
income leads to a decrease (increase) in the
demand for that good.
Demand Shifter (continued):
Prices of related goods:
- Substitutes:
goods for which an increase (decrease) in the
price of one good leads to an increase
(decrease) in the demand for the other good.
- Complements:
goods for which an increase (decrease) in the
price of one good leads to a decrease (increase)
in the demand for the other good.
The Demand Function
Qdx =f (Px, Py, M, H)
Qdx : the quantity demanded of good X
f : function
Px: the price of good X
Py: the price of a related good
M: income
H: value of any other variable that affects demand
Linear Demand Function
Qdx = a0 + a1Px + a2Py + a3M + a4H
Case:
Qdx = 12000 – 3 Px + 4 Py – 1 M + 2 A
M: income
A: advertising
Px = 200
Py = 15
A = 2000
M = 10000
- How much of good X do consumers purchase?
- Are good X and Y substitutes or complements?
- Is good X a normal or an inferior good?
Case:
Qdx = 12000 – 3(200) + 4(15) – 1 (10000)
+ 2 (2000)
= 5460
Consumer Surplus:
The value consumers get from a good but
do not have to pay for.
Figure 2-5 Page 44.
Supply
• Market supply:
a curve indicating the total quantity of a
good that all producers in a competitive
market would produce at each price,
holding input prices, technology, and other
variables affecting supply constant.
Supply (continued)
• Change in quantity supplied:
changes in the price of a good lead to a
change in the quantity supplied of that
good. This corresponds to a movement
along a given supply curve.
Supply (continued)
• Change in supply:
changes in variables other than the price
of a good, such as input prices or
technological advances, lead to a change
in supply. This corresponds to a shift of
the entire supply curve.
Supply Shifters
Affected by:
- Input prices,
- Technology or government regulations,
- Number of firms,
- Substitutes in production,
- Taxes,
- Producer expectations.
Supply Shifters (continued)
A per unit tax
Figure 2-7 Page 48
The Supply Function
Qsx = f (Px, Pr, W, H)
Qsx: the quantity supplied of a good
f: function
Px: price of the good
Pr: price of technologically related goods
W: price of an input
H: the value of some other variable that affects
supply
Linear Supply Function
Qsx = b0 + b1 Px + b2 Pr + b3 W + b4 H
Producer Surplus:
The amount producers receive in excess
of the amount necessary to induce them to
produce the good.
Figure 2-9 Page 51
Market Equilibrium
Qd = Qs
Case:
Qd = 10 – 2P
Qs = 2 + 2P
Determine the competitive equilibrium?
Price Restrictions And Market
Equilibrium
• Price ceiling:
the maximum legal price that can be
charged in a market.
Figure 2-11 Page 55
Price Restrictions And Market
Equilibrium (continued)
• Price floor:
the minimum legal price that can be
charged in a market.
Figure 2-12 Page 58
Comparative Statics (changes
In Demand)
• Effect the increase in demand of rental
cars.
Figure 2-13 Page 60.
Comparative Statics (changes
In Supply)
• Effect higher input prices
Figure 2-14 Page 62.
Homework:
The demand for good X is given by:
Qx = 1200 – 0.5 Px + 0.25 Py – 8 Pz
+ 0.1M
Py = 5900
Pz = 90
M = 55000
a. Indicate whether goods Y and Z are substitutes or
complements for good X.
b. Is X an inferior or normal good?
c. How many units of good X will be purchased when
Px = 4910
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