Description
It includes topics like demand schedule and demand curve, supply schedule and supply curve, elasticity of demand and supply
1.
2.
3.
Demand Schedule and Demand Curve Supply Schedule and the Supply Curve Elasticity of demand and supply
? Demand
- Total quantity customers are willing and able to purchase. ? A demand function is a behavior function for consumers. ? A supply function is a behavior function for producers. ? We describe market behavior using these two functions.
? Direct
Demand-for consumption goods Goods and services that satisfy consumer desires. ? Derived Demand-These are sometimes called intermediate goods. For example, demand for steel (an intermediate good) is derived from the demand for final goods (e.g., automobiles).
Demanded – amount of a good that the consumer is willing to buy and able to buy at a given price over a period of time. ? Law of Demand :All other things remaining unchanged, the quantity demanded of a good increases when its price decreases and vice versa. ? This relationship can be shown by a demand schedule, a demand curve or a demand function.
? Quantity
Demand Schedule shows the different quantities of goods that a consumer is willing to buy at various prices. ? Prices and quantities normally move in opposite directions
?
Prices 4 8 12 16 20
Quantity 28 15 5 1 0
?Demand
Curve : A curve showing the
relationship between the price of a good and the quantity demanded.
price
quantity
?Demand
?A
Function:
demand function is a causal relationship between a dependent variable (i.e., quantity demanded) and various independent variables (i.e., factors which are believed to influence quantity demanded) ? Q = f(P)
Where Q= quantity and P = price of a good. Example Q = 2 – 4P
? Own
Price ? Income of the consumer ? Price of other goods- 1. complements 2. substitutes ? Tastes and preferences ? Expectations of future prices ? Advertising ? Distribution of income
? Complementary
goods are a pair of goods consumed together. As the price of one goes up the demand for the other falls. Example- car and petrol ? Substitute goods are alternatives to each other. As the price of one goes up the demand for the other also goes up. Example – pepsi and coke
? Normal
goods are those goods whose demand goes up when the consumer’s income increases. ? Inferior goods are those goods whose demand falls when the consumer’s income increases. Example : autotravel, kerosene ? Giffen goods are those goods whose demand moves in same direction as price ? Snob or Veblen goods are those goods whose demand falls when price falls
?A
change in demand is reflected by shift of the Demand curve and is caused by a change in any of the non price determinants of demand
price Here, the curve shifts due to an increase in income or an increase in price of a substitute good etc qty
?A
change in quantity demanded is however reflected in a movement along the demand curve and is called an extension or contraction in demand. ? The movement from A to B is due to the change in price of the good all other factors remaining unchanged
A
B
? Elasticity:
A measure of the responsiveness of one variable to changes in another variable; the percentage change in one variable that arises due to a given percentage change in another variable. ? By converting each of these changes into percentages, the elasticity measure does not depend on the units in which we measure the variables.
Sensitivity of the quantity demanded to price is called: price elasticity of demand:
% change in quantity demanded ? Q / Q EP ? ? % change in price ?P/P
To get the average elasticity between two points on a demand curve we take the average of the two end points (for both price and quantity) and use it as the initial value: q2-q1/(q2+q1)/2 p2-p1/(p2+p1)/2
Own price elasticity: A measure of the responsiveness of the quantity demanded of a good to a change in the price of that good; the percentage change in quantity demanded divided by the percentage change in the price of the good. ? Elastic demand: Demand is elastic if the absolute value of the own price elasticity is greater than 1.
?
? elastic:
the quantity demanded changes more than in proportion to a change in price the quantity demanded changes less than in proportion to a change in price
? inelastic:
? Elastic
demand : Demand is elastic if the absolute value of own price elasticity is greater than 1. ? Inelastic demand: Demand is inelastic if the absolute value of the own price elasticity is less than 1. ? Unitary elastic demand: Demand is unitary elastic if the absolute value of the own price elasticity is equal to 1. ? Perfectly elastic demand : e= infinity ? Perfectly inelastic demand : e = 0
?
?P is the change in price. (?P1 E1
E=1
? TR
= P.Q ? MR = P + Q dP/dQ = P(1 + Q/P. dP/dQ) = P(1- 1/e) = AR(1-1/e) Hence if e=1, MR =0 if e =0 , MR = INFINITY if e = infinity, MR = AR
MR,AR
E=infinity
E=1
E=0 QTY MR
Total revenue
E=1
qty
Tr is max
? The
quantity supplied is the number of units that sellers want to sell over a specified period of time at a particular price. ? Law of Supply states that all other factors remaining unchanged the supply of a good increases as its price increases. This can be shown by a supply schedule, a supply curve or a supply function.
?
Supply schedule
price 1 5 8 13 20
quantity 2 10 15 25 35
?
There exists a positive relation between quantity and price
? Supply
Curve:
price
qty
• Supply function shows the relation between quantity
and price. It is a positive relation. Example : q= 4+3p
? Price ? Cost
of production ? Technological progress ? Prices of related outputs ? Govt policy
All factors other than price cause a shift of the supply curve and is called a change in supply
?
Price Elasticity of Supply:
• The responsiveness of supply to changes
in price • If es is inelastic (1) – supply can react quickly to changes in price
es =
% ? Quantity Supplied ____________________ % ? Price
? Equilibrium
- perfect balance in supply and
demand ? Determines market output and price
p p s eqm
dem q
? at
prices < equilibrium level: excess demand (amount by which quantity demanded exceeds quantity supplied at the specified price) ? at price > equilibrium level: excess supply ? equilibrium price is market clearing price: no excess demand or excess supply
Demand 800 1,150 1,500 1,850 2,200
Price $3,000 $2,500 $2,000 $1,500 $1,000
Supply 2,900 2,550 2,200 1,850 1,500
2,550
2,900
$500
$0
1,150
0
Any price above the equilibrium causes an excess supply and any price below the equilibrium causes a shortage. ? The market if uncontrolled will automatically arrive at the equilibrium price at which supply equals demand. ? Any shift in demand and supply curves will result in a new equilibrium ? Comparison of equilibrium is called comparative statics
?
?A
decrease in supply creates a shortage at P0. Quantity demanded is greater than quantity supplied. Price will • The lower total supply begin to rise. those is rationed to
who are willing and able to pay the higher price.
• A price ceiling is a maximum price that sellers may charge for a good, usually set by government. • Example: rent control • A price floor is a price above equilibrium price that the buyers have to pay. • Example : agricultural support price, minimum wages
? When
prices of food crops increase, the demand does not increase proportionally. ? Hence the revenue earned by farmers fall. ? The Govt announces a floor price for the farmers- agricultural price subsidy. ? This interference with prices comes at a cost to the Govt in form of storage costs of Govt granaries.
? Incidence
Supply of taxation:
after tax
supply
e1
pt
p1 p0
tax
eqm
demand
doc_389936790.pptx
It includes topics like demand schedule and demand curve, supply schedule and supply curve, elasticity of demand and supply
1.
2.
3.
Demand Schedule and Demand Curve Supply Schedule and the Supply Curve Elasticity of demand and supply
? Demand
- Total quantity customers are willing and able to purchase. ? A demand function is a behavior function for consumers. ? A supply function is a behavior function for producers. ? We describe market behavior using these two functions.
? Direct
Demand-for consumption goods Goods and services that satisfy consumer desires. ? Derived Demand-These are sometimes called intermediate goods. For example, demand for steel (an intermediate good) is derived from the demand for final goods (e.g., automobiles).
Demanded – amount of a good that the consumer is willing to buy and able to buy at a given price over a period of time. ? Law of Demand :All other things remaining unchanged, the quantity demanded of a good increases when its price decreases and vice versa. ? This relationship can be shown by a demand schedule, a demand curve or a demand function.
? Quantity
Demand Schedule shows the different quantities of goods that a consumer is willing to buy at various prices. ? Prices and quantities normally move in opposite directions
?
Prices 4 8 12 16 20
Quantity 28 15 5 1 0
?Demand
Curve : A curve showing the
relationship between the price of a good and the quantity demanded.
price
quantity
?Demand
?A
Function:
demand function is a causal relationship between a dependent variable (i.e., quantity demanded) and various independent variables (i.e., factors which are believed to influence quantity demanded) ? Q = f(P)
Where Q= quantity and P = price of a good. Example Q = 2 – 4P
? Own
Price ? Income of the consumer ? Price of other goods- 1. complements 2. substitutes ? Tastes and preferences ? Expectations of future prices ? Advertising ? Distribution of income
? Complementary
goods are a pair of goods consumed together. As the price of one goes up the demand for the other falls. Example- car and petrol ? Substitute goods are alternatives to each other. As the price of one goes up the demand for the other also goes up. Example – pepsi and coke
? Normal
goods are those goods whose demand goes up when the consumer’s income increases. ? Inferior goods are those goods whose demand falls when the consumer’s income increases. Example : autotravel, kerosene ? Giffen goods are those goods whose demand moves in same direction as price ? Snob or Veblen goods are those goods whose demand falls when price falls
?A
change in demand is reflected by shift of the Demand curve and is caused by a change in any of the non price determinants of demand
price Here, the curve shifts due to an increase in income or an increase in price of a substitute good etc qty
?A
change in quantity demanded is however reflected in a movement along the demand curve and is called an extension or contraction in demand. ? The movement from A to B is due to the change in price of the good all other factors remaining unchanged
A
B
? Elasticity:
A measure of the responsiveness of one variable to changes in another variable; the percentage change in one variable that arises due to a given percentage change in another variable. ? By converting each of these changes into percentages, the elasticity measure does not depend on the units in which we measure the variables.
Sensitivity of the quantity demanded to price is called: price elasticity of demand:
% change in quantity demanded ? Q / Q EP ? ? % change in price ?P/P
To get the average elasticity between two points on a demand curve we take the average of the two end points (for both price and quantity) and use it as the initial value: q2-q1/(q2+q1)/2 p2-p1/(p2+p1)/2
Own price elasticity: A measure of the responsiveness of the quantity demanded of a good to a change in the price of that good; the percentage change in quantity demanded divided by the percentage change in the price of the good. ? Elastic demand: Demand is elastic if the absolute value of the own price elasticity is greater than 1.
?
? elastic:
the quantity demanded changes more than in proportion to a change in price the quantity demanded changes less than in proportion to a change in price
? inelastic:
? Elastic
demand : Demand is elastic if the absolute value of own price elasticity is greater than 1. ? Inelastic demand: Demand is inelastic if the absolute value of the own price elasticity is less than 1. ? Unitary elastic demand: Demand is unitary elastic if the absolute value of the own price elasticity is equal to 1. ? Perfectly elastic demand : e= infinity ? Perfectly inelastic demand : e = 0
?
?P is the change in price. (?P1 E1
E=1
? TR
= P.Q ? MR = P + Q dP/dQ = P(1 + Q/P. dP/dQ) = P(1- 1/e) = AR(1-1/e) Hence if e=1, MR =0 if e =0 , MR = INFINITY if e = infinity, MR = AR
MR,AR
E=infinity
E=1
E=0 QTY MR
Total revenue
E=1
qty
Tr is max
? The
quantity supplied is the number of units that sellers want to sell over a specified period of time at a particular price. ? Law of Supply states that all other factors remaining unchanged the supply of a good increases as its price increases. This can be shown by a supply schedule, a supply curve or a supply function.
?
Supply schedule
price 1 5 8 13 20
quantity 2 10 15 25 35
?
There exists a positive relation between quantity and price
? Supply
Curve:
price
qty
• Supply function shows the relation between quantity
and price. It is a positive relation. Example : q= 4+3p
? Price ? Cost
of production ? Technological progress ? Prices of related outputs ? Govt policy
All factors other than price cause a shift of the supply curve and is called a change in supply
?
Price Elasticity of Supply:
• The responsiveness of supply to changes
in price • If es is inelastic (1) – supply can react quickly to changes in price
es =
% ? Quantity Supplied ____________________ % ? Price
? Equilibrium
- perfect balance in supply and
demand ? Determines market output and price
p p s eqm
dem q
? at
prices < equilibrium level: excess demand (amount by which quantity demanded exceeds quantity supplied at the specified price) ? at price > equilibrium level: excess supply ? equilibrium price is market clearing price: no excess demand or excess supply
Demand 800 1,150 1,500 1,850 2,200
Price $3,000 $2,500 $2,000 $1,500 $1,000
Supply 2,900 2,550 2,200 1,850 1,500
2,550
2,900
$500
$0
1,150
0
Any price above the equilibrium causes an excess supply and any price below the equilibrium causes a shortage. ? The market if uncontrolled will automatically arrive at the equilibrium price at which supply equals demand. ? Any shift in demand and supply curves will result in a new equilibrium ? Comparison of equilibrium is called comparative statics
?
?A
decrease in supply creates a shortage at P0. Quantity demanded is greater than quantity supplied. Price will • The lower total supply begin to rise. those is rationed to
who are willing and able to pay the higher price.
• A price ceiling is a maximum price that sellers may charge for a good, usually set by government. • Example: rent control • A price floor is a price above equilibrium price that the buyers have to pay. • Example : agricultural support price, minimum wages
? When
prices of food crops increase, the demand does not increase proportionally. ? Hence the revenue earned by farmers fall. ? The Govt announces a floor price for the farmers- agricultural price subsidy. ? This interference with prices comes at a cost to the Govt in form of storage costs of Govt granaries.
? Incidence
Supply of taxation:
after tax
supply
e1
pt
p1 p0
tax
eqm
demand
doc_389936790.pptx