Qd=f (P ,M ,PR , J ,Pe ,N )

where f means “is a function of” or “depends on,” and

Qd = quantity demanded of the good or service

P = price of the good or service

M = consumers’ income (generally per capita)

PR = price of related goods or services

J = taste patterns of consumers

Pe = expected price of the good in some future period

N = number of consumers in the market

Qd=a+bP+cM+d PR+e J+ f Pe+gN

Table 2.1Summary of the Generalized (Linear) Demand FunctionQd=a+bP+¿ cM+d PR+e J + f Pe+gN

Variable Relation to quantity demanded Sign of slope parameterP

M

PR

J

Pe

N

Inverse

Direct for normal goods

Inverse for inferior goods

Direct for substitute goods

Inverse for complement goods

Direct

Direct

Direct

b=ΔQ d/ΔPis negative

c=ΔQd /ΔM is positive

c=ΔQd /ΔPis negative

d=ΔQd /ΔPRis positive

d=ΔQd /ΔPR is negative

e¿ ΔQ d/Δ J is positive

f=ΔQ d/ΔPeis positive

g=ΔQd /ΔN is positive

Q4=1,800−20 P+0.6M−50PR

Q4=1,800−20 P+0.6 (20,000 )−50(250)

= 1,800 – 20P + 12,000 – 12,500

= 1,300 – 20P

TABLE 2.2The Demand Schedule for the Demand for the Demand Function Do :Qd=1,300−20 P

Price Quantity Demanded$65

60

50

40

30

20

10

0

100

300

500

700

900

1,100

TABLE 2.3Three Demand Schedules

(1) (2) (3) (4)

Price

Do :Qd=1,300−20 P Quantity demanded (M = $20,000)

D1 :Qd=1,600−20 P Quantity demanded (M = $20,000)

D2 :Qd=1,000−20 P Quantity demanded (M = $19,500)

$65

60

50

40

30

20

10

0

100

300

500

700

900

1,100

300

400

600

800

1,000

1,200

1,400

0

0

0

200

400

600

800

TABLE 2.4Summary of Demand Shifts

Determinants of demand Demand increasesa

Demand decreasesb

Sign of slope parameterc

1. Income (M) Normal goodInferior good

2. Price of related good (PR¿ Substitute goodComplement good

3. Consumer tastes (J)4. Expected price (Pe¿5. Number of consumers (N)

M risesM falls

PR risesPR fallsJ risesPe risesN rises

M fallsM rises

PRfallsPR risesJ fallsPe fallsN falls

c > 0c < 0

d > 0d < 0e > 0f > 0g > 0

aDemand increases when the demand curve shifts rightward.

bDemand decreases when the demand curve shifts leftwardcThis column gives the sign of the corresponding slope parameter in the generalized demand function.

SUPPLY

In general, economists assume that the quantity of a good offered for sale depends on six major variables”

1. The price of the good itself.2. The price of the inputs used to produce the good.3. The prices of goods related in production.4. The level of available technology.5. The expectations of the producers concerning the future price of the good.6. The number of firms or the amount of productive capacity in the industry.

Table 2.5Summary of the Generalized (Linear) Supply FunctionQs=h+kP+¿ I P I+mP r+nT +r Pe+sF

Variable Relation to quantity supplied Sign of slope parameterPP IPr

TPeF

DirectInverseInverse for substitutes in production (wheat and corn)Direct for complements in production (oil and gas)DirectInverseDirect

k=ΔQ s/ΔPis positive l ¿Qs /ΔPI is negative

m=ΔQs/ΔP ris negative

m=ΔQs/ΔP ris positiven=ΔQ s/ΔT is positiver=ΔQs /ΔPeis negatives=ΔQs/ ΔFis positive

TABLE 2.6The Supply Scheduled for the Supply FunctionS0 :Qs=100+10P

Price Quantity Demanded$65

60

50

40

30

20

10

750

700

600

500

400

300

200

TABLE 2.7Three Supply Schedules

(1) (2) (3) (4)

Price

S0 Quantity suppliedQs=100+10 P ¿¿)

S1 Quantity suppliedQs=250+10 P ¿¿)

S0 Quantity suppliedQs=−200+10 P ¿¿)

$65

60

50

40

30

20

10

750

700

600

500

400

300

200

900

850

750

650

550

450

350

450

400

300

200

100

0

0

TABLE 2.8Summary of Supply Shifts

Determinants of supply Supply increasesa

Supply decreasesb

Sign of slope parameterc

1. Price of inputs (P I¿2. Price of goods related in production

(P I¿Substitute goodComplement good

3. State of technology (T)4. Expected price (Pe¿5. Number of firms or productive

capacity in industry (F)

Pl falls

Pr fallsPr risesT risesPe falls

F rises

Pl rises

Pr risesPr fallsT fallsPerises

F falls

l < 0

m < 0m > 0n > 0r < 0

s > 0

aSupply increases when the supply curve shifts rightward.bSupply decreases when the supply curve shifts leftward.cThis column gives the sign of the corresponding slope parameter in the generalized supply function

TABLE 2.9Market Equilibrium

(1) (2) (3) (4)

Price

S0 Quantity supplied¿¿)

D0 Quantity demanded(Q¿¿d=1,300+20 P)¿

Excess supply (+) or excess demand (-) (Q s−Qd )

$65

60

50

40

30

20

750

700

600

500

400

300

0

100

300

500

700

900

+750

+600

+300

0

-300

-600

10 200 1,100 -900