Transcript Chapter 1

Chapter 4
Introduction to
the Demand
and Supply
Framework
Supply (cont’d)
• Supply Schedule—a table that shows the
quantity firms are willing and able to supply
at various prices.
• Supply Curve—a graph that shows the
quantities that sellers are willing and able to
supply at different prices.
Theory in Action…
• http://www.economist.com/world/na/displaystory.cfm?stor
y_id=8570280
Dreams of Californication Applied Topics: Supply and
demand model, changes in market equilibrium
• The article examines the effects of migration of
Californians to other parts of the U.S.
• Questions:
• Which determinant of demand identified in the article has
changed in the housing market in Salt Lake City and how
has it affected the demand curve for housing?
• Does it appear that there has been an increase in supply
or an increase in quantity of new houses supplied in Salt
Lake City between 2005 and 2006?
Changes in Demand or Supply
• Once an equilibrium price is established, it
won’t change unless surrounding (supply
and demand) conditions change.
• What happens if

Demand decreases

Demand increases

Supply increases
Fill in the Chart….Changes in Demand or
Supply
Equilibrium
Price
Demand Increases
Demand Decreases
Supply
Increases
Supply
Decreases
Equilibrium
Quantity
Fill in the Chart….Changes in Demand or
Supply
Equilibrium
Price
Equilibrium
Quantity
Rises
Rises
Falls
Falls
Supply
Increases
Falls
Rises
Supply
Decreases
Rises
Falls
Demand Increases
Demand Decreases
Changes in Demand and Supply
• When both curves shift, the resulting
changes in equilibrium price and quantity
are harder to predict.


Depends on the direction and magnitude of the
shifts
Draw it…
• Demand increase > Supply decrease
• Demand decrease < Supply increase
• Demand increase = Supply increase
Limits of Supply and Demand Analysis
• Thin Markets

Buyers and sellers are not in close contact.

Very few buyers or sellers
• Output of Some Markets Cannot Be Measured

Education
• Fluctuating Market Conditions

Using a static model (point in time) to analyze
dynamic markets (over time)
Chapter 4 Homework
• Questions 4, 8, 10, 16, and 18
Chapter 5
Elasticity
Defining a Market
• Allows buyers and sellers to exchange goods and
services
• Market edges defined by:

Geography
• What kind of market is Wendy’s in?


Local, national, international?
Product Characteristics
• Size, color, flavor, price…

Are McDonalds and Longhorn Steakhouse in the same market?
Elasticity
• Response of one variable to a change in
another variable
• Price elasticity of demand

Measure how sensitive consumers are to price
changes
%Q
Ed 
%P
Elasticity = percentage change in quantity
demanded divided by the
percentage change in price
Midpoint Formula
Qd 1  Qd 2
 Qd 1  Qd 2 


2


Ed 
P1  P2
 P1  P2 


 2 