Key issuesSupply and demand model To use supply and demand modelQuantity demandedWhat determines demand?Demand curveEffect of price changesLaw of demandDemand effects of other factorsEffect on pork demand of a rise in price of beefSummaryVariable definitionsDemand function Summing demand curvesQuantity suppliedSupply is a function ofSupply curveEffect of price on supplyThere is no "Law of Supply" Supply effects of other variablesSummaryGeneral supply functionSumming supply curvesSolved problemRestatement of problem Answer Answer (continued)Supply and demand: Market equilibriumEquilibriumDetermine equilibrium priceDetermine equilibrium quantity Invisible hand Market forces drive market to equilibrium Shocking the equilibriumGovernment policiesZimbabwe price controlsIn-class problem: price ceilingAnswerSupply need not equal demand The Price of a College EducationMarket for a College EducationWhen to use supply and demand modelWhen supply and demand model is inappropriateUse supply and demand model in Applying supply and demand modelElasticity of demandLinear demand curveInterpretation of pork demand elasticityTypes of elasticitiesDownward-sloping linear demand curveEstimated ElasticitiesIncome elasticity of demandPork income elasticity of demandCross-price elasticity of demandNegative cross-price elasticityPositive cross-price elasticity Price elasticity of supplyWhat’s the sign of the elasticity of supply?Elastic vs. inelastic supply curvePork supply elasticityLong run versus short runPredictions based on elasticitiesTwo types of sales taxesTax on consumerSpecific taxSin taxesQuestionPrice impact of taxKey issues• demand• supply• market equilibrium• shocking the equilibrium• effects of government interventions• when to use supply and demand modelSupply and demand model • most widely-used economic model• testable (like all good theories)• describes how consumers and suppliers interact in a market to determine quantity of a good sold and its priceTo use supply and demand model• you need to determine • buyers' behavior• sellers' behavior• how they interact• know whether the model is: applicable to the market under examinationQuantity demandedis the amount of a good or service that consumers want to buy at a given price, holding constant other factors that affect demandWhat determines demand?•tastes• price of this good• prices of other goods• income• information (cholesterol)• government actions • other factors: nicotine, ...Demand curve•shows quantity demanded—largest quantity that consumers are willing to buy—at each price, holding constant other factors that affect purchases•note: quantity demanded of a good or service can exceed quantity sold (or vice versa)• strange demand curve convention: price is on the vertical axisDemand Curve for Canadian PorkEffect of price changes• movement along the demand curve• demand curve is a concise summary of the answer to the question:what happens to the quantity demanded as the price changes, holding all other factors constant?Law of demand• demand curves slope down • ⇒ a drop in price results in an increase in quantity demanded (holding other factors constant)• one of the most important empirical finding in economicsDemand effects of other factors• change in any factor other than the price of the good causes a shift of the demand curve(not a movement along the demand curve)• this shift of the demand curve is a trick to avoid drawing 3D diagramsEffect on pork demand of a rise in price of beef• beef is a substitute for pork• at a given price of pork, a rise in the price of beef causes some people to switch from beef to porkA Shift of the Pork Demand CurveSummary• change in the price of a good causes a movement along a demand curve• change in any other factor besides the price causes a shift of the demand curveVariable definitions• Q = quantity of pork demanded (million kgper year)• P = price of pork ($ per kg)• Pb= price of beef ($ per kg)• Pc= price of poultry ($ per kg)• I = income of consumers (thousand $)Demand function • general functionQ = D(P, Pb, Pc, I)• specific (linear) pork demand functionQ = 171 – 20P + 20Pb+ 3Pc+ 2ISumming demand curves• total demand is sum of demand for all consumers• suppose there are 2 consumers with demand curves:Q1= D1(P)Q2= D2(P)• total quantity demanded = horizontal sum of quantity each consumer demands at each given price:Q = Q1+ Q2= D1(P) + D2(P)Aggregating the Demand for Cling PeachesQuantity suppliedis the amount of a good or service that firms want to sell at a given price, holding constant other factors that affect supplySupply is a function of•price• costs of production• government rules and regulations• technologySupply curve• increase in price of pork causes a movement along the supply curve (holding fixed other variables that affect supply)• supply curve is a concise summary of answer to the question:what happens to the quantity supplied as the price changes holding all other factors constant?Supply Curve of Canadian PorkEffect of price on supply• supply curve for pork is upward sloping • thus, increase in the price of pork ⇒movement along the supply curve, resulting in larger quantity of pork suppliedThere is no "Law of Supply" market supply curve may be upward sloping, vertical, horizontal, or downward slopingSupply effects of other variablesshift in a variable other than price of pork causes the entire supply curve to shiftA Shift of Pork Supply CurveSummary• change in price of pork causes a movement along the supply curve• when costs, government rules, or other variables that affect supply change, the supply curve shiftsGeneral supply functionSumming supply curvestotal supply curve• horizontal summation of individual supply curves• shows total quantity produced by all suppliers at each possible priceTotal Supply: The Sum of Domestic and Foreign SupplySolved problem• What is the effect of a ban on foreign imports of rice into Japan on the supply curve of rice to the Japanese market? • (suppose that domestic and foreign supply curves of rice in Japan are linear, upward sloping curves with the same intercept and different slopes)Restatement of problem• in most of our problems we are asked to determine how a change in a variable or policy affects one or more variables•what changes: foreign rice may no longer be imported•whichaffects foreign supply and
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