Professional Documents
Culture Documents
and
Supply
Analysis
Chapter 2
4.
4. The
TheMarket
MarketSupply
SupplyCurve
Curve
5.
5. Equilibrium
Equilibrium
6.
6. Characterizing
CharacterizingDemand
Demandand
andSupply
Supply
Elasticity
Elasticity
7.
7. Back
Backof
ofthe
theEnvelope
EnvelopeTechniques
Techniques
Chapter Two
3.
3. The
TheMarket
MarketDemand
DemandCurve
Curve
Motivations
Example: U.S. Corn Market
2003-2004:
Historical
Historical
price:
price:
$2.00
$2.00 per
per
Prices
rose to $3.00 per bushel
bushel
bushel
Motivations
Example: U.S. Corn Market
2002-2003
Decrease in supply due to drought in the corn 2004-2005
Unexpectedly large U.S. corn crops
2006-2008
Changes in U.S. government policy
Bubble years
Increase in production costs due to oil price
increases and rains and flooding wiped out corn
crop
2008-2009
Weather conditions back to normal
Chapter Two
growing states
Defined:
Competitive Markets
Defined:
The
Market
Demand
Function tells us that the
quantity
of
a
good
all
consumers in the market are
willing to buy is a function of
various factors.
Chapter Two
Market Demand
Derived Demand
Defined:
Chapter Two
Defined:
Chapter Two
10
Defined:
11
e Demand
he
Demand Curve
Curve shifts
shifts when
when factors
factors other
other than
than ow
ow
price
price change
change
Chapter Two
12
Markets
Markets defined
defined by
by commodity,
commodity, geography,
geography, time.
time.
Chapter Two
13
Note:
Market Supply
The Market Supply Function:
Chapter Two
14
Chapter Two
15
Defined:
Chapter Two
16
17
Defined:
Chapter Two
18
e Supply
Supply Curve
Curve shifts
shifts when
when factors
factors other
other than
than own
own price
price cha
cha
Market Equilibrium
is a price such that, at this price, the quantities
demanded and supplied are the same.
is a point at which there is no tendency for the
market price to change as long as exogenous
variables remain unchanged.
Demand
Demandand
andsupply
supplycurves
curvesintersect
intersectatatequilibrium
equilibrium
Sup
p
a
Dem
ly
Chapter Two
nd
19
Market Equilibrium
20
Q* = 100
Chapter Two
21
Excess Demand/Supply
Excess Demand/Supply
Excess supply
when price is $5
Price (dollars
per bushel)
5.00
E
4.00
3.00
Excess demand
when price is $3
11 13 14
23
Demand
Decreases:
P Q
24
Demand Increases:
P Q
Supply Decreases:
PQ
25
Supply Increases:
P Q
26
Defined:
Chapter Two
27
Price Elasticity
Price Elasticity
Slope
Slope is
is the
the ratio
ratio of
of absolute
absolute changes
changes
in
in quantity
quantity and
and price.
price. (=
(= Q/P).
Q/P).
Elasticity
Elasticity is
is the
the ratio
ratio of
of relative
relative (or
(or
percentage)
percentage) changes
changes in
in quantity
quantity and
and
price.
price.
Chapter Two
28
Price Elasticity
Key Characteristics:
Re-writing, we
have:
P = a/b (1/b)P
Elasticity is:
Q,P = (Q/ P)(P/Q) = -b(P/Q)
Elasticity falls from 0 to - along the linear demand
curve, but slope is constant.
Example: Calculate elasticity when P = 30 and Qd =
400 10P
Answer: Q,P = -3 elastic
30
Chapter Two
Qd = a bP
a/b
Q,P = -
a/2b
Q,P
= -1
Inelastic region
Q,P = 0
a/2
Chapter Two
31
Elastic region
Price
Quantity
Chapter Two
32
Demand is elastic
Fall in Q > Rise in P
falls
Demand is inelastic
Fall in Q < Rise in P
Chapter Two
TR
TR falls
33
Time Horizon
Long-run more price elastic
Chapter Two
34
Availability of Substitutes
35
Defined:
Durable Goods
Other Elasticities
Chapter Two
37
Chapter Two
38
Estimating
Elasticity
Chapter Two
39
U.S. Boilers
1990
Chapter Two
40
Example:
Equilibrium
Measures of Elasticity
Back-of-the-Envelope Calculations
Chapter Two
42