CH 02
CH 02
CH 02
CHAPTER 2 OUTLINE
2.1
supply
1. Production costs
(e.g. wages, interest charges, and the costs of raw materials.)
2. Technology & Productivity
Shifting
variable
s
Demand curve
Relationship between the quantity of a good that consumers are willing to
buy (QD ) and the price of the good (P), holding constant other factors.
QD = QD(P)
The demand curve is
downward sloping:
holding other things equal,
consumers will want to
purchase more of a good as its
price goes down (i.e., QD
increases)
If consumers incomes
increase, we would expect to
see an increase in demand
say from D to D,
Shiftin
g
variabl
es
Practice Questions
Practice
A highly successful advertising campaign of New Balance
makes more and more people want to buy its athletic shoes,
as a result:
a. The demand of New Balance athletic shoes increases;
b. The quantity demanded of New Balance athletic shoes
increases;
c. The price of New Balance athletic shoes decrease to
encourage people to buy more;
d. The demand of New Balance athletic shoes is not
affected;
e. None of above.
2.2
Equilibrium
equilibrium (or market clearing) price
Price that equates the quantity supplied to the
quantity demanded.
surplus
shortage
2.3
Shocks:
A new tech is developed
which lowers the production
cost.
S shifts to S
The new equilibrium is E.
Shocks:
The impact of oil spill in
Mexico gulf on the
demand of Nova Scotia
oyster.
D shifts to D
The new equilibrium is
E.
QD increases.
Change in P
depends on the
amount by which
each curve shifts
and the shape of
each curve.
Change in P is
uncertain.
Question 2:
For each of the following scenarios, illustrate
graphically
how the exogenous event change the price of corn in
the U.S. market.
a.
b.
c.
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Question 3:
In each case below, identify the effect on the
market for coal and illustrate it with a graph.
a) A new government regulation requiring air
purifiers in all work areas.
b) A widespread news report that demand for coal
will be much lower next year.
c)
Question 4:
Which of the following would cause an
unambiguous increase in the equilibrium price in a
market?
a) An increase in supply and an increase in demand.
b) An increase in supply and a decrease in demand
c)
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Question 5:
Assume that steak and potatoes are complements.
When the price of steak goes up, the demand
curve for potatoes:
A) shifts to the left.
B) shifts to the right.
C) remains constant.
D) shifts to the right initially and then returns to its
original position.
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Question 6:
The price of good A goes up. As a result, the demand
for good B shifts to the left. From this we can infer
that:
A) good A is used to produce good B.
B) good B is used to produce good A.
C) goods A and B are substitutes.
D) goods A and B are complements.
E) none of the above
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D
D
D
D
D
(2.1)
Example
Price of oil increases 10%
Quantity demanded decreases 1%
-1%
Ep
.1
10%
D
D
P
E =-0.1 means:
1 percent increase in the price would lead
to a 0.1 percent decrease in the quantity
demanded (QD).
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Points To
1. Please note that Ep is always negative
Emphasize
D
Unit Elastic: EP =1
D
EP =-
EP =0
Elasticities of Supply
price elasticity of supply Percentage change in quantity supplied
resulting from a 1-percent increase in price.
Arc Elasticity of
Demand
arc elasticity of demand
range of prices.
D
D
(2.4)
(240) 0.32
Q P 2630
Question:
The demand for books is: Qd = 120 - P
The supply of books is: Qs = 5P
a) Find equilibrium price and quantity.
b) If P = $15, which of the following is true?
A) There is a surplus equal to 30.
B) There is a shortage equal to 30.
C) There is a surplus, but it is impossible to
determine how large.
D) There is a shortage, but it is impossible to
determine how large.
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Question:
The demand for packs of Pokemon cards is
given by the equation QD = 500,000 45,000P.
A) At a price of $2.50 per pack, what is the
quantity demanded?
B) At $5.00 per pack, what is the price
elasticity of demand?
C) Is the demand elastic, inelastic, or unit
elastic, when P=$5?
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Determinants of the
Price Elasticity of Demand
1. The existence, number, and quality of
Substitutes
2. Share of Budget
3. The Length of Time Allowed for
Adjustment
2.5
Demand
(a) Gasoline: Short-Run and
Long-Run Demand Curves
Demand of automobiles is
less elastic in the long run
than in the short run.
Why?
Demand
and
Durabili
ty
Income
Elasticities
Income elasticities also differ from the short run to the long run.
For most goods and servicesfoods, beverages, fuel, entertainment, etc.
the income elasticity of demand is larger in the long run than in the
short run.
For a durable good, the opposite is true. The short-run income elasticity
of demand will be much larger than the long-run elasticity.
EXAMPLE 2.6
TABLE 2.1
ELASTICIT
Y
10
Price
-0.2
0.3
0.4
0.5
0.8
Income
0.2
0.4
0.5
0.6
1.0
TABLE 2.2
ELASTICIT
Y
Price
Income
10
1.2
0.9
0.8
0.6
0.4
3.0
2.3
1.9
1.4
1.0
Table 2.3
Supply of Copper
Short-Run
0.20
0.43
0.25
Long-Run
1.60
0.31
1.50
EXAMPLE 2.7
FIGURE 2.17
PRICE OF BRAZILIAN
COFFEE
When droughts or freezes
damage Brazils coffee
trees, the price of coffee
can soar.
The price usually falls
again after a few years, as
demand and supply adjust.
EXAMPLE 2.7
EXAMPLE 2.7
EXAMPLE 2.7
2.7
EFFECTS OF GOVERNMENT
INTERVENTION
PRICE CONTROLS
Effects of Price
Controls
Without price controls, the
market clears at the
equilibrium price and quantity
P0 and Q0.
If price is regulated to be no
higher than Pmax, the quantity
supplied falls to Q1, the
quantity demanded increases
to Q2, and a shortage
develops.
Question:
Ice cream can be frozen. In the short run the
magnitude of the own price elasticity of
demand for ice cream:
A) is higher than in the long run.
B) is lower than in the short run.
C) is the same as in the long run.
D) does not depend on the fact that ice cream
can be frozen.
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Question:
For computers and other business equipment,
small changes in business earnings tend to
generate relatively large short-run changes
in the demand for this equipment. In the
long run, the responsiveness of demand for
business equipment with respect to income
changes tends to be:
A) even more responsive.
B) less responsive.
C) equally responsive.
D) none of the above
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Practice Question
The following two equations are the supply and demand functions
Demand:
Find the cross price elasticity of demand for natural gas and oil at
the point where the market of natural gas clears out.
Are natural gas and oil complements or substitutes?
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