1. Chapter 2 Review of S and D
Supply Curve:
Shows quantity supplied at each possible price, ceteris paribus (c.p.).
Slopes upward (positive relationship)
Qs = Qs(P)
Shift S Curve:
Clarify movement along vs shift.
C.P. factors:
Interpret shift S curve:

2. Demand Curve
Shows quantity demanded at each possible price, ceteris paribus (c.p.)
Slopes downward (negative relationship)
Qd = Qd(P)
Movement along versus shift.
C.P. factors:
Interpret shift D curve:

3. Market Mechanism Put Supply and Demand Together Equilibrium1. 2.
Describe re-equilibrating process by changing C.P. factor:
Increase in income causes increase in demand (shift D rightward)
At old P, Qd greater than Qs: so individuals bid up price till reach new equilibrium.

4. Elasticity Definition: %Qd in response to a 1% P Or: %Qd / %P
What is %? Absolute change in variable divided by original level of variable.
Ep = (Qd/Q) / (P/P)
= (P/Q) (Q/P)
Remember: (Q/P) is 1/slope.
Ep = price elasticity of demand; usually negative.

5. More About Elasticities
Elastic: Ep 1
Inelastic: Ep 1
Unitary Elastic: Ep 1
Fact: While slope is constant along a linear demand curve, elasticity is not.
Fact: At top of demand curve, when P is high and Q is low, Ep is big negative number so D curve is very elastic.
Fact: As move down D curve to right, Ep falls (because P is  while Q is , so P/Q is ).

6. Example Price Demand Supply 60 22 14 80 20 16 100 18 18 120 16 20
1. What is P*, Q*?
2. When P=$80, what is ED?

7. Relative Elasticities
Rule: the steeper the slope of the curve, the less elastic.
Completely horizontal demand curve: infinitely elastic:
So:
Completely vertical demand curve: completely inelastic:

8. Nearly Horizontal Demand Curve
Elasticity approaches infinity: Recall: 1/slope = Q/P
If nearly flat curve: small  P causes a huge Q. This is same as: huge  / small  , which equals a very big number.

9. Income Elasticity of Demand
Measure responsiveness of Qd to change in income (note this is a ceteris paribus factor).
EI = %in Qd resulting from a 1%  in income.
EI = (Q/Q) / (I/I)
= I/Q  (Q/I).

10. Cross-Price Elasticity of Demand
Measures responsiveness in Qd of one good to change in price of a related good (note this is a change in a c.p. factor).
Cross-price elasticity of demand = % in Qd resulting from a 1%  in the price of a related good.
EQ1P2 = (Q1/Q1) / (P2/P2)
 P2/Q1  Q1/P2.
EQP  0: the two goods are substitutes.
EQP  0: the two goods are complements.

11. Price Elasticity of Supply
Price Elasticity of Supply: Responsiveness of Qs to P.
ESP = %Qs / %P
= (Qs/Qs) / (P/P)
 P/Qs  Qs/P
Usually positive.

12. Wage Elasticity of Supply
Measures responsiveness of Qs to changes in the cost of labor (a ceteris paribus factor).
ESW = %Qs / %W
= (Qs/Qs) / (W/W)
 W/Qs  Qs/W.
Usually negative.
Remember: W   cost of production.

13. Short-Run versus Long-run Elasticities
Focal point: how much time do sellers and consumers have to respond (in their Qs and Qd) to changes in price?
In general: LR adjustment is more full, free adjustment so that LR elasticity is larger; BUT not true all the time.
Key factors:
Durability.
Availability of substitutes

14. Government Price Controls
Key: If government sets P so that there is no single P for which Qs=Qd, then there will be a shortage or surplus.
Be able to show the Qs and Qd for any price.
Price ceiling:
Price floor: