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Market Forces: Demand And Supply

Demand Market demand curve: a curve indicating the total quantity of a good all consumers are willing and able to purchase at each possible price, holding the price of related goods, income, advertising, and other variables constant.

Demand (continued) Change in quantity demanded: changes in the price of a good lead to a change in the quantity demanded of that good. This corresponds to a movement along a given demand curve.

Demand (continued) Change in demand: changes in variables other than the price of a good, such as income or price of another good, lead to a change in demand. This corresponds to a shift of entire demand curve.

Demand Shifter: Because: - Income, - Prices of related goods, - Advertising and consumer tastes, - Population, - Consumer expectations.

Demand Shifter (continued): Income: - Normal good: a good for which an increase (decrease) in income leads to an increase (decrease) in the demand for that good. - Inferior good: a good for which an increase (decrease) in income leads to a decrease (increase) in the demand for that good.

Demand Shifter (continued): Prices of related goods: - Substitutes: goods for which an increase (decrease) in the price of one good leads to an increase (decrease) in the demand for the other good. - Complements: goods for which an increase (decrease) in the price of one good leads to a decrease (increase) in the demand for the other good.

The Demand Function Qdx =f (Px, Py, M, H) Qdx : the quantity demanded of good X f : function Px: the price of good X Py: the price of a related good M: income H: value of any other variable that affects demand

Linear Demand Function Qdx = a0 + a1Px + a2Py + a3M + a4H

Case: Qdx = – 3 Px + 4 Py – 1 M + 2 A M: income A: advertising Px = 200 Py = 15 A = 2000 M = How much of good X do consumers purchase? - Are good X and Y substitutes or complements? - Is good X a normal or an inferior good?

Case: Qdx = – 3(200) + 4(15) – 1 (10000) + 2 (2000) = 5460

Consumer Surplus: The value consumers get from a good but do not have to pay for. Figure 2-5 Page 44.

Supply Market supply: a curve indicating the total quantity of a good that all producers in a competitive market would produce at each price, holding input prices, technology, and other variables affecting supply constant.

Supply (continued) Change in quantity supplied: changes in the price of a good lead to a change in the quantity supplied of that good. This corresponds to a movement along a given supply curve.

Supply (continued) Change in supply: changes in variables other than the price of a good, such as input prices or technological advances, lead to a change in supply. This corresponds to a shift of the entire supply curve.

Supply Shifters Affected by: - Input prices, - Technology or government regulations, - Number of firms, - Substitutes in production, - Taxes, - Producer expectations.

Supply Shifters (continued) A per unit tax Figure 2-7 Page 48

The Supply Function Qsx = f (Px, Pr, W, H) Qsx: the quantity supplied of a good f: function Px: price of the good Pr: price of technologically related goods W: price of an input H: the value of some other variable that affects supply

Linear Supply Function Qsx = b0 + b1 Px + b2 Pr + b3 W + b4 H

Producer Surplus: The amount producers receive in excess of the amount necessary to induce them to produce the good. Figure 2-9 Page 51

Market Equilibrium Qd = Qs

Case: Qd = 10 – 2P Qs = 2 + 2P Determine the competitive equilibrium?

Price Restrictions And Market Equilibrium Price ceiling: the maximum legal price that can be charged in a market. Figure 2-11 Page 55

Price Restrictions And Market Equilibrium (continued) Price floor: the minimum legal price that can be charged in a market. Figure 2-12 Page 58

Comparative Statics (changes In Demand) Effect the increase in demand of rental cars. Figure 2-13 Page 60.

Comparative Statics (changes In Supply) Effect higher input prices Figure 2-14 Page 62.

Homework: The demand for good X is given by: Qx = 1200 – 0.5 Px Py – 8 Pz + 0.1M Py = 5900 Pz = 90 M = a. Indicate whether goods Y and Z are substitutes or complements for good X. b. Is X an inferior or normal good? c. How many units of good X will be purchased when Px = 4910