Econ 410: Micro TheorySupply and Demand ReviewMonday, August 27th, 2007The Demand Curve The quantity demandedof a good is the amount of a good that consumers are willing and able to buy at a particular price. A demand curveshows the quantity demanded at any given price. A movement alongthe demand curve represents a change in the quantity demanded A shift of the entirecurve is referred to as a change in demand.The Demand Curve We can illustrate this relationship graphically, or as a function: Qd= D(P) Inverse Demand Function P = P(Qd) = D-1(Qd) Shifting the Demand Curve If a change causes consumers to buy more or less of a good at any given price, the demand curve shifts. These changes could include: Increases in population Advertising or other changes in preferences Changes in the price of substitute or complementary goodsShifting the Demand CurveThe Supply Curve The supply curveshows the quantity of a good that producers are willing to sell at any given price. Just like the demand curve, it can be illustrated both graphically and mathematically:Qs= Qs(P)Shifting the Supply Curve A variety of factors can shift the supply curve, including: Changes in the prices of raw materials Wages, interest rates, and other production costsShifting the Supply CurveMarket Equilibrium The supply and demand curves intersect at the market equilibrium The tendency in a free market is for markets to clear This is sometimes referred to as the market mechanism This means that surpluses and shortages are eliminated at the market-clearing price and quantity.Changes in Market Equilibrium Shifts in supply or demand will change the market-clearing price and quantity. Distortions can also change equilibrium prices and quantities. These include: Taxes Subsidies Quotas Tariffs Firms with market powerPrice Elasticity of Demand An elasticitymeasures the percentage change in one variable that will occur as a result of a 1% increase in another variable Price Elasticity of Demand InterpretationPQQPPQEp%%Elasticities of Demand Linear Demand Curves Q = a – bPOther Demand ElasticitiesIncome Elasticity of DemandCross-Price Elasticity of DemandIQQIIQEI%%211221%%21PQQPPQEPQElasticity Practice The demand for a bushel of wheat in 1991 was given by: Qd= 3550-266P At a price of $3.46 per bushel, what is the price elasticity of demand? If the price of wheat falls to $3.27 per bushel, what happens to the total revenue generated from the sale of wheat? Qd= 3550-266PAt a price of $3.46 per bushel, what is the price elasticity of demand?Solution:At a price of $3.46:Qd($3.46)= 3550-266(3.46)=2629.64 bushelsSimilarly, Qd($3.27)= 2680.18Elasticity PracticePQQPEp46.3$27.3$64.262918.268064.262946.3$35.019.054.50Elasticity Practice If the price of wheat falls to $3.27 per bushel, what happens to the total revenue generated from the sale of wheat?Solution: At a price of $3.46,  Total Revenue = P · Q = $3.46 · 2629.64 = $9098.55 At a price of $3.27, Total Revenue = P · Q = $3.27 · 2680.18 = $8764.19 Total revenue decreasesby $334.36Other Elasticities Price Elasticity of Supply Point vs. Arc Elasticities While point elasticities are determined at a particular point, arc elasticities are determined over a range of prices. Elasticity and the Long Run Demand Example – Gas Prices and Fuel Efficiency Supply Capacity ConstraintsFor next time… Read pages 24-40 and 55-57 of your text Equivalent to sections 2.3, 2.4, 2.7, and the first part of 2.5 Assignment:Questions for Review:#2, #5, #7, #10-11Exercises:#1, #3-6  Write out answers clearly on a separate sheet of paper with your name and PID. Show all work and include graphs when necessary. Due Friday, August