7/27/2019 s -07 - A - Supply and Demand -2

1/13

ANNOUNCEMENT:

FIRST EXAMINATION

THE FIRST UNIT EXAM WILL BE ON

December 10, 2010 (FRIDAY) TENTATIVE DATE

1

EXAMS BEGIN 30 MINUTESEARLIER, FROM 7:30 A.M. AND ENDAT 9 A.M.

ROOMS TO BE ANNOUNCED.

1

ANNOUNCEMENTS (#2):

Examples of

TEST QUESTIONS

Nov. 30, 2010 Econ 11 -- Lecture #7 2

available at the reserve section of the

UP School of Economics LIBRARY.

A recent exam will be posted in UVLE.

Lecture #7:

SUPPLY & DEMAND

MARKET EQUILIBRIUM OF

SUPPLY AND DEMAND

Nov. 30, 2010 Econ 11 -- Lecture #7 3

AND WHAT HAPPENS TO PRICE

AND QUANTITY

ELASTICITY AND ITS

MEANING

performance with respectto changes on how youmove from one level toanother

Shifts(changes) in demandand supply

Demand and Supply ofEquilibrium

7/27/2019 s -07 - A - Supply and Demand -2

2/13

HOW SUPPLY AND

DEMAND SETTLE AT

Nov. 30, 2010 Econ 11 -- Lecture #7 4

EQUILIBRIUM

SUPPLY AND DEMANDPRICE D S

P0

Nov. 30, 2010 Econ 11 -- Lecture #7 5

0

QUANTITY

Market

equilibrium

settles at price

P0and quantity

Qo..Q0

P

per

Q

D S D-S

50 15 53 ?

SUPPLY AND DEMAND

50

40

30

PRICE D S

Nov. 30, 2010 Econ 11 -- Lecture #7 6

40 23 41 ?

30 31 29 ?

20 39 17 ?

10 47 5 ?

10 20 30 40 50

20

10

0

QUANTITY

42

meaning, there is a highdemand but a low supply

7/27/2019 s -07 - A - Supply and Demand -2

3/13

P

per

Q

D S D-S

50 15 53 -38

SUPPLY AND DEMAND

50

40

30

PRICE D SInadequate demand

= Excess supply

7

40 23 41 ?

30 31 29 ?

20 39 17 +12

10 47 5

10 20 30 40 50

20

10

0

QUANTITY

Excess demand

= Inadequate supply

P

per

Q

D S D-S

50 15 53 -38

SUPPLY AND DEMAND

50

40

30

PRICE D SInadequate demand

= Excess supply

8

40 23 41 -18

30 31 29 +2

20 39 17 +12

10 47 5 +42

10 20 30 40 50

20

10

0

QUANTITY

Excess demand

= Inadequate supply

P

per

Q

D S D-S

50 15 53 -38

SUPPLY AND DEMAND

50

40

30

PRICE D S

9

40 23 41 -18

30 31 29 +2

20 39 17 +12

10 47 5 +42

10 20 30 40 50

20

10

0

QUANTITY

7/27/2019 s -07 - A - Supply and Demand -2

4/13

SUPPLY AND DEMAND

50

40

30

PRICE D S

P0

1010 20 30 40 50

20

10

0

QUANTITY

Market

equilibrium

settles at price

P0and quantity

Qo..

Q0

AT MARKET EQUILIBRIUM:

Quantity demanded equals quantity supplied.

The marketclears at the equilibrium price.

Nov. 30, 2010 Econ 11 -- Lecture #7 11

have demand.

Sellers have no excess or inadequate supplies.

Or what is the same, there is no excess

demand or excess supply.

SUPPLY AND DEMANDPRICE D S

P0

12

0

QUANTITY

Market

equilibrium

settles at price

P0and quantity

Qo..

Q0

7/27/2019 s -07 - A - Supply and Demand -2

5/13

CHANGES OR

SHIFTS IN DEMAND

13

SHIFTS IN DEMAND (#1)

An INCREASE IN DEMAND:

This means thatat each level of

Nov. 30, 2010 Econ 11 -- Lecture #7 14

prices, MORE goods are bought.

Graphically, this is a shift of the

demand schedule to the right of

the old demand schedule.

AN INCREASE IN DEMAND

PRICE

P

15

0

QUANTITY

Q1 Q2

Old

demand

New demand

schedule

a move to the right meansan increase

7/27/2019 s -07 - A - Supply and Demand -2

6/13

SHIFTS IN DEMAND (#2)

A DECREASE IN DEMAND:This means that at each level of

Nov. 30, 2010 Econ 11 -- Lecture #7 16

prices,LESS goods are bought.

Graphically, this is a shift of the

demand schedule to the left of the

old demand schedule.

A DECREASE IN DEMAND

PRICE

P

17

0

QUANTITY

Q2 Q1

New

demand

schedule

Old

Demand

schedule

SHIFTS IN SUPPLY

Nov. 30, 2010 Econ 11 -- Lecture #7 18

a shift to the left but meansa decrease in the demand

7/27/2019 s -07 - A - Supply and Demand -2

7/13

AN INCREASE IN SUPPLYPRICE S

P

S

19

0

QUANTITY

Q

A DECREASE IN SUPPLYPRICE S

P

S

20

0

QUANTITY

QQ

ANALYSIS OF CHANGES

(SHIFTS) IN MARKET

CONDITIONS

Nov. 30, 2010 Econ 11 -- Lecture #7 21

SUPPLY

7/27/2019 s -07 - A - Supply and Demand -2

8/13

THE MARKET

EQUILIBRIUM CAN BE

ALTERED BY CHANGES INSUPPLY AND DEMAND

Question: All other things remaining the same, what happens to theEQUILIBRIUM PRICE AND QUANTITY when

CHANGES IN DEMAND

(OR SUPPLY) TAKE PLACE?

AN INCREASE IN DEMANDPRICE D S

P0

D

P1

23

0

QUANTITY

RESULT: The

price GOES

UP and

quantity

INCREASES.

Q0

Q1

A DECREASE IN DEMANDPRICE D S

P1

D

P0

24

0

QUANTITY

RESULT: The

price goes

DOWN and

quantity

FALLS.

Q1

Q0

7/27/2019 s -07 - A - Supply and Demand -2

9/13

AN INCREASE IN SUPPLYPRICE SD

P0

S

25

0

QUANTITY

RESULT: The

price goes

DOWN and

quantity

INCREASES.

Q0

P1

Q1

AN FALL IN SUPPLYPRICE SD

P1

S

26

P0

0

QUANTITY

RESULT: The

price goes

UP and

quantity

FALLS.

Q1

Q0

MARKET EQUILIBRIUM

WHEN BOTH SUPPLY

AND DEMAND ARE

SHIFTING

7/27/2019 s -07 - A - Supply and Demand -2

10/13

S

CASE #1: THE INCREASE IN DEMAND IS

LARGER THAN THE INCREASE IN SUPPLYPRICE

D

S

P0

D

P1

28

0

QUANTITY

RESULT: P

increases; Q

also

increases.

Q0

Q1

S

CASE #2: THE INCREASE IN SUPPLY IS

LARGER THAN THE INCREASE IN DEMANDPRICE

D

S

P0

D

29

0

QUANTITY

RESULT: P

falls; Q

increases.

Q0

Q1

P1

SUMMARY:INCREASES IN DEMAND AND SUPPLY

Case #1: Increase in demand is more than

the increase in supply

o will rise

Nov. 30, 2010 Econ 11 -- Lecture #7 30

o P will rise

Case #2: Increase in supply is more

substantial than the increase in demand

o Q will rise

o P will fall

7/27/2019 s -07 - A - Supply and Demand -2

11/13

C

a

se

P

per

Q

Q

A 50 15

DEMAND SCHEDULE

50

40

30

PRICE

31

B 40 23

C 30 31

D 20 39

E 10 47

10 20 30 40 50

20

10

0

QUANTITY31

THE CONCEPT OF

ELASTICITY

response of quantity sold

Nov. 30, 2010 Econ 11 -- Lecture #7 32

to a change in the price of

the good

FORMULA FOR ELASTICITY

Q

PPercent change of Price

P

Elasticity = =

tells us about the Law of

Demand

7/27/2019 s -07 - A - Supply and Demand -2

12/13

C

a

se

P

per

Q

D

A 50 15

DEMAND SCHEDULE

50

40

30

PRICEA

B

C

P=Change in Price

P=Base Price

Q=Change in Quantity

Q=Base Quantity

34

B 40 23

C 30 31

D 20 39

E 10 47

10 20 30 40 50

20

10

0

QUANTITY

D

E

Lower P

More Q

Calculate elasticity between

points C and D

Change in Price = -10 (from 30 to 20).

P = 50 (=30+20) to get baseprice

Percent change in Price = (Change in= - = - = -

C

a

s

e

P

per

Q

D

35

- - - . .

Change in Quantity= 8 (from 31 to 39)

To substitute for Q = 70 ( = 31+39) to getbase quantity.

Percent change in Quantity = (Change inQ)/Base Q = 8/70 = 0.114

Elasticity = -0.57 (=0.114/ (-0.2))

B

C 30 31

D 20 39

E

Value of the price elasticity, e, is

between infinity and zero!(Note: Ignore the sign and use the absolute value

ELASTIC e >1 Quantity demanded is verysensitive to a change in price. The schedules of

.

UNIT ELASTIC e = 1 A unit change in priceleads to the same unit change in quantity

demanded.

INELASTIC e < 1 Quantity demanded isnotvery sensitive to a change in price. The schedules of

demand and of supply are relatively steep.

inger the value oflute value, the higheresponse to a unitge

7/27/2019 s -07 - A - Supply and Demand -2

13/13

For instance, if elasticity, e, is

e =50

highly elastic, demand schedule isrelatively flat.

e = 1.2 elastic, demand schedule is moderately

Nov. 30, 2010 Econ 11 -- Lecture #7 37

steep.

e = 0.8 inelastic, demand schedule is lessmoderately steep.

e = 0.1 highly inelastic, demand schedule isvery steep.

What is e = infinite amount?

End of todays lecture.

Nov. 30, 2010 Econ 11 -- Lecture #7 38

oo ay

[Lecture 7]