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Name: __________________________________ READING & VIDEO OUTLINE Intermediate MicroeconomicsDr. Sauer

Chapter 2: Demand, Supply, and Market Equilibrium

2.1 Demand, Supply, and Market Equilibrium

A market can be characterized along 3 dimensions--

-

Demand Curvesa market demand curve is:

derived demand refers to:

direct demand refers to:

The Law of Demand says:

Work through the LBD exercise 2.1 here: [screencast]

Supply Curves

a market supply curve is:

The Law of Supply says:

Factors of Production are:

Price (in thousands)

Quantity

(in millions)

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Work through the LBD exercise 2.2 here: [screencast]

Market EquilibriumEquilibrium is:

Work through the LBD exercise 2.3 here: [screencast]

Shifts in Supply and Demand

Shifts in *either* curve:

Increase in Demand + Unchanged Supply = ___________ price and _________ quantity

Decrease in Supply + Unchanged Demand = ___________ price and _________ quantity

Decrease in Demand + Unchanged Supply = ___________ price and _________ quantity

Increase in Supply + Unchanged Demand = ___________ price and _________ quantity

Price (in Canadian dollars)

Quantity

(in billions)

price

quantity

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Work through the LBD exercise 2.4 here: [screencast]

Shifts in *both* curves:

2.2 Price Elasticity of Demand- measures the sensitivity of _______________________ to price

Formula:

Rules for Evaluating

Value Classification Interpretation

= 0

-1 < < 0

= -1

- < < -1

= -

price

quantity

(in millions)

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Work through the LBD exercise 2.5 here: [screencast]

Elasticities Along Specific Demand Curves

Lineardemand curves take the form ______________________.

Inverse demand curves refer to:

The choke price is

Formula:

Interpretation:

Constant Elasticity Demand Curves take the form _________________________.

Formula:

Interpretation:

Work through the LBD exercise 2.6 here: [screencast]

price

quantity

Demand

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Price Elasticity of Demand and Total RevenueTotal Revenue =

If demand is inelastic and the price rises, TR will __________.

If demand is elastic and the price rises, TR will __________.

Determinants of the Price Elasticity of Demand

Demand tends to be more price elastic when1.

2.

3.

Market-Level vs Brand-Level Price Elasticities of Demand

2.3 Other Elasticities

Income Elasticity of DemandIncome elasticity of demand refers to:

Formula:

If income elasticity is positive then ____________________________________.

If income elasticity is negative then ____________________________________.

Cross-Price Elasticity of DemandCross-price elasticity of demand refers to:

Formula:

If cross-price elasticity is positive then ____________________________________.

If cross-price elasticity is negative then ____________________________________.

Price Elasticity of SupplyPrice elasticity of supply refers to:

Formula:

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2.4 Elasticity in the Long Run and the Short Run

Greater Elasticity in the Long Run than the Short RunThe long-run demand curve is

The short-run demand curve is

The long-run supply curve is

The short-run supply curve is

Greater Elasticity in the Short Run than the Long Run

durable goods are

2.5 Back-of-The-Envelope Calculations [screencast]

Watch the video for this section and fill in the notes here.

To find a specific demand curve:____________________________________ or ____________________________________

BOTE Calculations

Assume demand is ________________: Q = a - bP

We can derive a specific demand curve if we know---

Well need to find a and b and we can write the demand curve equation.

Finding bRecall the formula for elasticity for linear demand:

If we know the elasticity, current price, and current quantity, we can find b. Rearrange theequation to get

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Finding aThe current price and quantity must be points on the demand curve we are trying to describe.That is:

Substitute the expression for b into the demand equation:

Solve for a.

If we know the elasticity and current quantity we can find a.

Example: In 1990, US per capita consumption of chicken was 70 pounds per person. The average retailprice of chicken was $0.70 per pound. Estimates for the demand elasticity of chicken range from -0.5 to-0.6.

The equation describing the demand for chicken in 1990 is:

___________________________________2.6 Identifying Supply and Demand Curves on the Back of an Envelope

We will work through this section together in class.

2.7 Identifying the Price Elasticity of Demand from Shifts in Supply