Download Overview Of Course - University of Texas at Dallas

Demand
1.
2.
3.
4.
5.
6.
7.
Defined for a single market – particular product
and particular consumers.
Each unit of the good is identical to all other
units.
Represents highest price consumers are willing
to pay, and quantity they want at a given price.
Time dimensions
Holds everything but price and quantity constant
(income, tastes, price of other goods, gravity,
Y2k problems….)
law of demand – demand slopes down – based on
empirical observation.
movement along versus movement on
1
P
Demand
D
Q
2
Demand
1.
2.
3.
4.
5.
6.
7.
Defined for a single market – particular product
and particular consumers.
Each unit of the good is identical to all other
units.
represents highest price consumers are willing to
pay.
Holds everything but price and quantity constant
(income, price of other goods, gravity, Y2k
problems….)
time dimensions
law of demand – demand slopes down – based on
empirical observation.
movement along versus movement on
3
P1
Demand for WLM*
P2
PWLM
D
Q
Q1
2
4
QE
*“Winners, Losers and Microsoft”
P
Shift in Demand for WLM
Perhaps a positive review in the
Wall Street Journal leads to an
increase in demand curve
D1
D
Q
5
Price Elasticity Of Demand
1.
2.
3.
def: percentage change in quantity divided
by percentage change in price
(ΔQ/Q)/(ΔP/P) or (ΔQ/ΔP) (P/Q)
measure of responsiveness
a.
b.
c.
d.
If Elasticity is >1 known as elastic (responsive
customers)
If Elasticity is =1 ; unit elastic
If Elasticity is <1; inelastic (less responsive
customers)
Infinite and zero elasticity
6
Illustrations of elasticity
D with zero elasticity
P
D with infinite elasticity
Q
7
Elasticity and TR
1.
2.
3.
When elasticity is greater than 1 (elastic)
increases in price lead to decreases in
revenue and vice-versa
When elasticity is equal to 1, changes in
price lead to no change in revenues
When elasticity is less than 1 (inelastic)
increases in price lead to increases in
revenue.
8
Implications of Elasticity
1.
2.
3.
4.
5.
If Elasticity is <1, firm can always increase
Profit by increasing price (revenues increase and
costs decrease because output decreases)
If Elasticity =1, firm can always increase profit
by increasing price
If Elasticity>1 firm can not necessarily increase
its profits by a change in price.
Thus firms that maximize profits must have
elasticities >1.
Example of VideoTape Sales Demonstrates
Importance of knowing elasticity.
9
Long Run and Short Run Elasticities
1. Elasticity is greater in the long run
a. consumers have more time to react to price
changes
b. For example, if the price of gasoline goes up,
consumers at first can try to reduce the
amount they drive, but this is often difficult.
Over time, they can by more fuel efficient
cars or move closer to their work.
10
P
new higher price
original price
D after consumers
have time to adjust to price change
D before consumers
have much time to adjust
amount consumed amount consumed
after longer period after short period
of adjustment\
of adjustment\
11
Q
Supply:
1.
2.
3.
Represents minimum price sellers require
to voluntarily provide the product.
assume it slopes up for now. In reality it
depends on the cost conditions of the firm.
Same assumptions as with demand:
everything else is held constant.
12
Meaning of Supply
S
P2
minimum price firm is willing
to accept. Should be equal to the
cost of producing the additional output
P1
Q1
13
Q2
Meaning of (Stable) Equilibrium
1.
2.
3.
4.
A situation such that the variables of interest
remain at rest until disturbed by some outside
force. For stability, the variables must return to
the equilibrium after being disturbed by some
force.
Gravity and the resting place of tennis balls.
We assume many producers and consumers to
start the analysis.
Surplus and shortages take the place of gravity
in these markets.
14
Illustration of Supply Demand
Equilibrium
S
Surplus
P1
Pe
P2
Shortage
D
Q1
15
Qe
Q2
Examples of changes in Equilibrium
1. Supply and Demand analysis assumes that
market moves from one equilibrium position to
another.
2. Shifts in D or S alter equilibrium. For example,
how would you expect the price and quantity of
Pepsi Cola to change when:
a.
b.
c.
d.
e.
3.
Price of Coca Cola falls.
Price of fructose goes up
Surgeon general warns of soda threat to health.
Winter changes to summer.
TV ads for cola banned
Answers on next slide.
16
Changing Equilibrium
S1
2
P2
4
P4
S2
1
P1
D2
3
P3
D1
Q1
17
Q2Q3
Q4