Chapter 2 The Basics of Supply and Demand Supply and Demand >The Market Mechanism >Changes in Market Equilibrium >Elasticities of Supply and Demand >Short-Run versus Long-Run Elasticities >Effects of Government Intervention-Price Controls
Chapter 2 The Basics of Supply and Demand ➢ Supply and Demand ➢ The Market Mechanism ➢ Changes in Market Equilibrium ➢ Elasticities of Supply and Demand ➢ Short-Run versus Long-Run Elasticities ➢ Effects of Government Intervention-Price Controls
2 Supply and Demand 2.1 Supply curve-Relationship between the quantity of a good that producers are willing to sell and the price of the good. Qs=Qs(P) P2 ●● Q Q2 Quantity
2 Supply and Demand 2.1 Supply curve-Relationship between the quantity of a good that producers are willing to sell and the price of the good. QS= QS (P) Q Quantity Q1 2 P2 P1 S S’
The supply curve show how the quantity of a good offered for sale changes as the price of the good changes. The supply curve is upward sloping;the higher the price,the more firms are able and willing to produce and sell. If production costs fall,firms can produce the same quantity at a lower price or a larger quantity at the same price.The supply curve then shifts to the right
The supply curve show how the quantity of a good offered for sale changes as the price of the good changes. The supply curve is upward sloping; the higher the price, the more firms are able and willing to produce and sell. If production costs fall, firms can produce the same quantity at a lower price or a larger quantity at the same price. The supply curve then shifts to the right
2.2 Demand Curve Demand curve-Relationship between the quantity of a good that consumers are willing to buy and the price of the good. Qp-Qp(P) Price : P2 P Quantity
2.2 Demand Curve Demand curve-Relationship between the quantity of a good that consumers are willing to buy and the price of the good. QD =QD(P) Q2 Quantity Q1 P1 P2 Price D D’
The demand curve show how the quantity of a good demanded by consumers depends on its price. The demand curve is downward sloping;holding other things equal,consumers will want to purchase more of a good the lower is its price. The quantity demanded may also depend on other variables,such as income,the weather,and the prices of other goods. For most products,the quantity demanded increases when income rises.A higher income level shifts the demand curve to the right
The demand curve show how the quantity of a good demanded by consumers depends on its price. The demand curve is downward sloping; holding other things equal, consumers will want to purchase more of a good the lower is its price. The quantity demanded may also depend on other variables, such as income, the weather, and the prices of other goods. For most products, the quantity demanded increases when income rises. A higher income level shifts the demand curve to the right
>Substitutes-Two goods for which an increase in the price of one leads to an increase in the quantity demanded of the other. >Complements-Two goods for which an increase in the price of one leads to a decrease in the quantity demanded of the other
➢ Substitutes-Two goods for which an increase in the price of one leads to an increase in the quantity demanded of the other. ➢ Complements-Two goods for which an increase in the price of one leads to a decrease in the quantity demanded of the other
2.2 The Market Mechanism Equilibrium(or market-clearing)price-Price that equates the quantity supplied to the quantity demanded. >Market mechanism-Tendency in a free market for price to change until the market clears. >Surplus-Situation in which the quantity supplied exceeds the quantity demanded. >Shortage-Situation in which the quantity demanded exceeds the quantity supplied
2.2 The Market Mechanism ➢ Equilibrium(or market-clearing)price-Price that equates the quantity supplied to the quantity demanded. ➢ Market mechanism-Tendency in a free market for price to change until the market clears. ➢ Surplus-Situation in which the quantity supplied exceeds the quantity demanded. ➢ Shortage-Situation in which the quantity demanded exceeds the quantity supplied
Supply-demand analysis is a basic tool of microeconomics. In competitive markets,supply and demand curves tell us how much will be produced by firms and how much will be demanded by consumers as a function of price. Surplus Shortage : : Q*
❑ Supply-demand analysis is a basic tool of microeconomics. In competitive markets, supply and demand curves tell us how much will be produced by firms and how much will be demanded by consumers as a function of price. Q P Q* P* S D Surplus Shortage
The market mechanism is the tendency for supply and demand to equilibrate (i.e.,for price to move to the market-clearing level), so that there is neither excess demand nor excess supply. P Surplus S P P* Shortage Q*
❑ The market mechanism is the tendency for supply and demand to equilibrate (i.e., for price to move to the market-clearing level), so that there is neither excess demand nor excess supply. Q* P* S D Q P P1 P2 Shortage Surplus
2.3 Changes in Market Equilibrium S Price P Q2 Q1 Q3 Quantity New Equilibrium Following Shift in Supply When the supply curve shifts to the right,the market clears at a lower price P3 and a larger quantity Q3
2.3 Changes in Market Equilibrium Quantity Price Q1 Q3 P3 P1 When the supply curve shifts to the right, the market clears at a lower price P3 and a larger quantity Q3 . S S’ D New Equilibrium Following Shift in Supply Q2