Supply and Demand chapter 2 Copyright 2014 McGraw-Hill
Education. All rights reserved. No reproduction or distribution
without the prior written consent of McGraw-Hill Education.
Slide 2
2-2 Learning Objectives Explain what supply and demand curves
for a good, and supply and demand functions, represent. Identify
various market forces that shift supply and demand curves. Use the
concept of market equilibrium to calculate the equilibrium price
and the amount bought and sold. Evaluate how changes in demand or
supply affect market equilibrium. Understand elasticity and the way
economists use it to measure the responsiveness of demand or
supply. Copyright 2014 McGraw-Hill Education. All rights reserved.
No reproduction or distribution without the prior written consent
of McGraw-Hill Education.
Slide 3
2-3 Market Equilibrium DemandSupply Elasticities Copyright 2014
McGraw-Hill Education. All rights reserved. No reproduction or
distribution without the prior written consent of McGraw-Hill
Education.
Slide 4
2-4 Overview Demand curves Concept, representation, shifts
Supply curves Concept, representation, shifts Market equilibrium
Elasticities Responsiveness of demand or supply Copyright 2014
McGraw-Hill Education. All rights reserved. No reproduction or
distribution without the prior written consent of McGraw-Hill
Education.
Slide 5
2-5 Demand Curve The demand curve shows how much buyers of a
product want to purchase at each possible price holding fixed all
other factors that affect demand. Q P D Copyright 2014 McGraw-Hill
Education. All rights reserved. No reproduction or distribution
without the prior written consent of McGraw-Hill Education.
Slide 6
2-6 Demand Shifts Prices of related products Substitutes P 1 D
substitute shifts right D Q P DD Copyright 2014 McGraw-Hill
Education. All rights reserved. No reproduction or distribution
without the prior written consent of McGraw-Hill Education.
Slide 7
2-7 Demand Shifts Prices of related products Substitutes P good
1 D substitute shifts right Complements P good 1 D complement
shifts left P Q D DD Copyright 2014 McGraw-Hill Education. All
rights reserved. No reproduction or distribution without the prior
written consent of McGraw-Hill Education.
Slide 8
2-8 Demand Shifts Prices of related products Substitutes P good
1 D substitute shifts right Complements P good 1 D complement
shifts left Income Normal good M D shifts right Copyright 2014
McGraw-Hill Education. All rights reserved. No reproduction or
distribution without the prior written consent of McGraw-Hill
Education. P Q D DD
Slide 9
2-9 Demand Shifts Prices of related products Substitutes P good
1 D substitute shifts right Complements P good 1 D complement
shifts left Income Normal good M D shifts right Inferior good M D
shifts left P Q D DD Copyright 2014 McGraw-Hill Education. All
rights reserved. No reproduction or distribution without the prior
written consent of McGraw-Hill Education.
Slide 10
2-10 Movements along vs. Shifts Change in price of the product
movement along the curve P Q D Copyright 2014 McGraw-Hill
Education. All rights reserved. No reproduction or distribution
without the prior written consent of McGraw-Hill Education.
Slide 11
2-11 Movements along vs. Shifts Change in price of the product
movement along the curve Change in some other factor shift of the
entire curve P Q D DD Copyright 2014 McGraw-Hill Education. All
rights reserved. No reproduction or distribution without the prior
written consent of McGraw-Hill Education.
Slide 12
2-12 Demand function Quantity Demanded = D(Price, Other
factors) Holding other factors constant at P potatoes = $0.50 per
pound, P butter = $4 per pound, and income at $30,000: Copyright
2014 McGraw-Hill Education. All rights reserved. No reproduction or
distribution without the prior written consent of McGraw-Hill
Education.
Slide 13
2-13 Supply Curve The supply curve shows how much sellers of a
product want to sell at each possible price holding fixed all other
factors that affect supply. P Q S Copyright 2014 McGraw-Hill
Education. All rights reserved. No reproduction or distribution
without the prior written consent of McGraw-Hill Education.
Slide 14
2-14 Supply shifts Prices of inputs Technology
Taxes/regulations Other factors P Q S SS Copyright 2014 McGraw-Hill
Education. All rights reserved. No reproduction or distribution
without the prior written consent of McGraw-Hill Education.
Slide 15
2-15 Supply shifts Prices of inputs Technology
Taxes/regulations Other factors P Q S SS Copyright 2014 McGraw-Hill
Education. All rights reserved. No reproduction or distribution
without the prior written consent of McGraw-Hill Education.
Slide 16
2-16 Movements along vs. Shifts Change in price of the product
movement along the curve P Q S Copyright 2014 McGraw-Hill
Education. All rights reserved. No reproduction or distribution
without the prior written consent of McGraw-Hill Education.
Slide 17
2-17 Change in price of the product movement along the curve
Change in some other factor shift of the entire curve P Q S SS
Movements along vs. Shifts Copyright 2014 McGraw-Hill Education.
All rights reserved. No reproduction or distribution without the
prior written consent of McGraw-Hill Education.
Slide 18
2-18 Supply function Quantity Supplied = S(Price, Other
factors) Holding other factors constant at P fuel = $2.50 per
gallon, P soybeans = $8 per bushel: Copyright 2014 McGraw-Hill
Education. All rights reserved. No reproduction or distribution
without the prior written consent of McGraw-Hill Education.
Slide 19
2-19 Market Equilibrium Demand Supply At the equilibrium price
the amounts supplied and demanded are equal. Copyright 2014
McGraw-Hill Education. All rights reserved. No reproduction or
distribution without the prior written consent of McGraw-Hill
Education.
Slide 20
2-20 Market equilibrium Excess supply sellers lower their
prices Q s decreases and Q d increases lower excess supply, until
it disappears P Q D S P high QdQd QsQs Excess supply Copyright 2014
McGraw-Hill Education. All rights reserved. No reproduction or
distribution without the prior written consent of McGraw-Hill
Education.
Slide 21
2-21 Market equilibrium P Q D S QdQd QsQs P low Excess demand
buyers increase their bids Q s increases and Q d decreases lower
excess demand, until it disappears Copyright 2014 McGraw-Hill
Education. All rights reserved. No reproduction or distribution
without the prior written consent of McGraw-Hill Education.
Slide 22
2-22 Market equilibrium P Q D S Q d = Q s Equilibrium Copyright
2014 McGraw-Hill Education. All rights reserved. No reproduction or
distribution without the prior written consent of McGraw-Hill
Education.
Slide 23
2-23 Changes in market equilibrium P Q D S P Q Example: demand
shift DD P Q Copyright 2014 McGraw-Hill Education. All rights
reserved. No reproduction or distribution without the prior written
consent of McGraw-Hill Education.
Slide 24
2-24 Copyright 2014 McGraw-Hill Education. All rights reserved.
No reproduction or distribution without the prior written consent
of McGraw-Hill Education.
Slide 25
2-25 Copyright 2014 McGraw-Hill Education. All rights reserved.
No reproduction or distribution without the prior written consent
of McGraw-Hill Education.
Slide 26
2-26 Effect of hurricanes on market equilibrium Copyright 2014
McGraw-Hill Education. All rights reserved. No reproduction or
distribution without the prior written consent of McGraw-Hill
Education.
Slide 27
2-27 Effect of increase on demand and supply Copyright 2014
McGraw-Hill Education. All rights reserved. No reproduction or
distribution without the prior written consent of McGraw-Hill
Education.
Slide 28
2-28 Copyright 2014 McGraw-Hill Education. All rights reserved.
No reproduction or distribution without the prior written consent
of McGraw-Hill Education.
Slide 29
2-29 Responsiveness of equilibrium price and quantity to
changes in supply (a) Horizontal demand curve P Q S S P = P D Q Q P
Q S S (a) Vertical demand curve D Q = Q Copyright 2014 McGraw-Hill
Education. All rights reserved. No reproduction or distribution
without the prior written consent of McGraw-Hill Education.
Slide 30
2-30 Steeper demand curve Larger change in price Smaller change
in quantity Responsiveness of equilibrium price and quantity to
changes in supply P Q S S P Q D1D1 D2D2 Q2Q2 P2P2 Q1Q1 P1P1
Copyright 2014 McGraw-Hill Education. All rights reserved. No
reproduction or distribution without the prior written consent of
McGraw-Hill Education.
Slide 31
2-31 Responsiveness of equilibrium price and quantity to
changes in demand Copyright 2014 McGraw-Hill Education. All rights
reserved. No reproduction or distribution without the prior written
consent of McGraw-Hill Education.
Slide 32
2-32 Steeper supply curve Larger change in price Smaller change
in quantity Responsiveness of equilibrium price and quantity to
changes in demand Copyright 2014 McGraw-Hill Education. All rights
reserved. No reproduction or distribution without the prior written
consent of McGraw-Hill Education.
Slide 33
2-33 Elasticity measures responsiveness Elasticity measures the
percentage change in Y caused by a percentage change in X Why use
elasticity instead of slope? Slopes depend on units Elasticities
are unit- free measures Copyright 2014 McGraw-Hill Education. All
rights reserved. No reproduction or distribution without the prior
written consent of McGraw-Hill Education.
Slide 34
2-34 Price elasticity of demand Measures how responsive the
quantity demanded is to changes in prices Copyright 2014
McGraw-Hill Education. All rights reserved. No reproduction or
distribution without the prior written consent of McGraw-Hill
Education.
Slide 35
2-35 Price elasticity for linear demand curves where -B is the
slope of the linear demand curve Copyright 2014 McGraw-Hill
Education. All rights reserved. No reproduction or distribution
without the prior written consent of McGraw-Hill Education.
Slide 36
2-36 Elasticities along a linear demand curve Inelastic Elastic
Unit elasticity Copyright 2014 McGraw-Hill Education. All rights
reserved. No reproduction or distribution without the prior written
consent of McGraw-Hill Education.
Slide 37
2-37 Two extreme demand curves Copyright 2014 McGraw-Hill
Education. All rights reserved. No reproduction or distribution
without the prior written consent of McGraw-Hill Education.
Slide 38
2-38 Total expenditure and elasticity of demand Elastic TE/P
< 0 Unit elasticity TE/P = 0 Inelastic TE/P > 0 Copyright
2014 McGraw-Hill Education. All rights reserved. No reproduction or
distribution without the prior written consent of McGraw-Hill
Education.
Slide 39
2-39 Price and total expenditure (linear demand) Elastic TE/P
< 0 Unit elasticity TE/P = 0 Inelastic TE/P > 0 Copyright
2014 McGraw-Hill Education. All rights reserved. No reproduction or
distribution without the prior written consent of McGraw-Hill
Education.
Slide 40
2-40 Price elasticity of supply Measures how responsive the
quantity supplied is to changes in prices Copyright 2014
McGraw-Hill Education. All rights reserved. No reproduction or
distribution without the prior written consent of McGraw-Hill
Education.
Slide 41
2-41 Two extreme supply curves Perfectly elasticPerfectly
inelastic Copyright 2014 McGraw-Hill Education. All rights
reserved. No reproduction or distribution without the prior written
consent of McGraw-Hill Education.
Slide 42
2-42 Income elasticity of demand Copyright 2014 McGraw-Hill
Education. All rights reserved. No reproduction or distribution
without the prior written consent of McGraw-Hill Education.
Slide 43
2-43 Cross-price elasticity of demand Copyright 2014
McGraw-Hill Education. All rights reserved. No reproduction or
distribution without the prior written consent of McGraw-Hill
Education.
Slide 44
2-44 Review The demand curve shows how much of the product
consumers want to buy at each possible price, holding fixed all
other factors that affect demand. The supply curve shows how many
units firms want to sell at each possible price, holding fixed all
other factors that affect supply. Movement along a curve vs. shift
of the entire curve. At the market equilibrium the amounts supplied
and demanded are equal. Elasticity measures the responsiveness of
one variable to changes in another variable. Copyright 2014
McGraw-Hill Education. All rights reserved. No reproduction or
distribution without the prior written consent of McGraw-Hill
Education.
Slide 45
2-45 Looking forward In the future we will study how consumers
and firms make decisions Next we will focus on weighing benefits
and costs, introducing several key concepts such as opportunity
cost, and economic methods such as the marginal approach Copyright
2014 McGraw-Hill Education. All rights reserved. No reproduction or
distribution without the prior written consent of McGraw-Hill
Education.