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DEMAND The relationship between demand and priceThe relationship between demand and price –the law of demand –the income effect –the substitution effect The demand curveThe demand curve

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DEMAND Other determinants of demandOther determinants of demand –tastes –number and price of substitute goods –number and price of complementary goods –income –distribution of income –expectations Movements along and shifts in the demand curveMovements along and shifts in the demand curve

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D1D1 Price P OQ0Q0 Q1Q1 Quantity An increase in demand D0D0

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SUPPLY The relationship between supply and priceThe relationship between supply and price The supply curveThe supply curve –why supply curves generally slope upwards Other determinants of supplyOther determinants of supply –costs of production –profitability of alternative products (substitutes in supply) –profitability of goods in joint supply –nature and other random shocks –aims of producers –expectations of producers –Number of producers

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P QO S2S2 S0S0 S1S1 IncreaseDecrease Shifts in the supply curve

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Quantity (tonnes: 000s) Price (pence per kg) E D C B A a b c d e Supply Demand The determination of market equilibrium (potatoes: monthly)

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Quantity (tonnes: 000s) Price (pence per kg) E D C B A a b c d e Supply Demand SHORTAGE (300 000) The determination of market equilibrium (potatoes: monthly)

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Quantity (tonnes: 000s) Price (pence per kg) E D C B A a b c d e SURPLUS (330 000) Supply Demand The determination of market equilibrium (potatoes: monthly)

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Quantity (tonnes: 000s) Price (pence per kg) E D C B A a b c d e QeQe PePe Supply Demand The determination of market equilibrium (potatoes: monthly)

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P Q O Pe1Pe1 Pe2Pe2 Qe1Qe1 Qe2Qe2 S g h i D1D1 D2D2 Effect of a shift in the demand curve

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P Q O Pe1Pe1 Pe3Pe3 Qe3Qe3 Qe1Qe1 D S1S1 S2S2 jg k Effect of a shift in the supply curve

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ELASTICITY Elasticity Elasticity –use of proportionate or percentage changes –the sign (positive or negative) –the value (greater or less than one) Price elasticity of demand (P d): determinantsPrice elasticity of demand (P d): determinants –number and closeness of substitute goods –the proportion of income spent on the good –time

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ELASTICITY Price elasticity of demand and consumer expenditure (P x Q)Price elasticity of demand and consumer expenditure (P x Q) –effects of a price change on expenditure: elastic demand –effects of a price change on expenditure: inelastic demand –extreme cases –applications to price decisions

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ELASTICITY Measurement of elasticity: arc elasticityMeasurement of elasticity: arc elasticity –the formula for price elasticity of demand: Q/Q ÷ P/P –using the average or 'mid-point' method

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P (£) Q (000s) m n Q P mid Q mid P P d = 10 2 15 7 = = 10/15 x 7/2 = 70/30 = 7/3 = 2.33 Demand Measuring elasticity using the arc method

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ELASTICITY Measurement of elasticity: point elasticityMeasurement of elasticity: point elasticity –the formula for price elasticity of demand: dQ/dP x P/Q –the elasticity of a straight-line demand curve (constant dQ/dP) –the elasticity of a curved demand curve: dQ/dP is the tangent to the curve

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P Q 50 30 0 40 100 D r P d = (1 / slope) x P/Q = 100/50 x 30/40 = 60/40 = 1.5 Measuring elasticity at a point

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D1D1 D2D2 SiSi S SLSL P1P1 P4P4 P3P3 P2P2 Q1Q1 Q3Q3 Q4Q4 P Q O a b c d Supply in different time periods

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ELASTICITY Income elasticity of demandIncome elasticity of demand –measurement –determinants –applications Cross-price elasticity of demandCross-price elasticity of demand –measurement –determinants –applications

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Part 2 Markets: Demand, Supply, and Elasticity

Part 2 Markets: Demand, Supply, and Elasticity

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