gls1e_chapter2 goolsbee levitt economics
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Supply and Demand
Copyright 2013 Worth Publishers, All Rights Reserved MicroeconomicsGoolsbee/Levitt/ Syverso1/e
2
Chapter Outline
2.1 Markets and Models
2.2 Demand
2.3 Supply
2.4 Market Equilibrium
2.5 Elasticity
2.6 Conclusion
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Introduction
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2In this chapter, we introduce the supply anddemandmodel. We will:
Describe the basics o supply and demand!se equations and "raphs to representsupply and demand
#naly$e markets or "oods and ser%icesusin" the supply and demand model
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2.1Markets and Models
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hat is a market!# market is characteri$ed by a speciic
&roduct or ser%ice bein" bou"ht and sold
'ocation
&oint in time
Markets"acilitate e#chan$e, includin" economic
resources and inal "oods and ser%ices
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2.1Markets and Models
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What are the supplyand demand or a "ood(Supply%)he combined amount o a "ood that all producers in amarket are willin" to sell
Demand%)he combined amount o a "ood that all consumersare willin" to buy
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2.2Demand
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What actors inluence the demand or a"ood or ser%ice(
&rice'um(er o" consumers
Consumer )ealth
Consumer tastes
&rices o" other* related $oods Compliments and substitutes
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2.2Demand
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Many actors inluence demand or "oods andser%ices* is there one actor that stands out(
+ocus on how the price o a "ood inluences the+uantity demanded by consumers
Demand cur,e describes relationship betweenquantity demanded and price, holdin" all other
actors constant
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2.2Demand
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+i"ure -. Demand or )omatoes
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2.2Demand
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Consider the market or oran"es. We want to map out thequantity /in pounds0 demanded by local consumers at %ariousprices /12pound0
0 400 800 1,200 1,600 2,000 2,400 Quantity of oranges
(pounds)
Price of oranges
(dollars/pound)
1
2
3
4
5
6
#t 13, consumers demand nooran"es4 this is known as the demandchoke price
#s the price drops, consumersdemand a "reater quantity ooran"es
We draw a demand cur,ethatconnects all the obser%ed price5quantity combinations
-MM/- 0O S /-&S
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2.2Demand
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We can also describe the demand cur%emathematically
)he demand cur%e on the pre%ious slide is "i%en as
QD= 2,400 400P
where QDis the quantity o oran"es demanded /inpounds0 and P is the price o oran"es /12pound0
It is common in economics to plot price on the%ertical a6is.
Sol%in" or price as a unction o quantity demandedyields the in,erse demand cur,e
P = 6 0.0025QD
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2.2Demand
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What about the other actors that inluencedemand()he demand cur%e is "raphed in two dimensions4 all
other actors are assumed constantI another actor chan"es, the demand cur%e will shift
Chan$e in +uantity demanded a mo%ement alongthedemand cur%e in response to a price chan"e, with
e%erythin" else held constant
Chan$e in demand a shit o the entire demandcur%e caused by a chan"e in a non5price actor thataects demand
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2.2Demand
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+i"ure -.- Shits in the Demand Cur%e
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pplication
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Mad Co) disease and (ee"
Bovine spongiform encephalopathy/Mad CowDisease0, is a potentially atal disease contractedthrou"h the consumption o inected bee products
Schlenker and 7illas58oas /-990 in%esti"ate theimpact o the announcement o the irst conirmedcase o MCD in the !S /December -;, -99;0 ondaily bee sales or a national supermarket chain
)he authors ind a si"niicant drop in the quantityo bee purchased ollowin" the announcement:appro6imately -< less bee was purchased in theollowin" ;= days
>ow do we represent this ?shock@ usin" demandcur%es(
2
Citation: Wolram Schlenker and Soia 8. 7ilas58oas. -99. Consumer and Market Aesponses to Mad Cow
Disease. American Journal of Agricultural Economics /B0:B9=-.
Image: FreeDigitalPhotos.net
Image: FreeDigitalPhotos.net
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pplication
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2
0Quantity ofbeef per day(millions of pounds)
Price of beef($/pound)
3
4 5
Demand cure prior to
announcement of !"D
Demand cure afterannouncement of !"D
Prior to discovery, consumers demand five millions pounds of beefper day at $3 per pound numbers are e!amples"
Post#discovery, health concerns cause demand to shift inard,
reducing %uantity demanded at $3 by one million pounds per day
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2.2Demand
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Why do we treat price dierently(
.&rice is usually the most important actor inluencin"demand
-.&rices in most markets can chan"e easily and oten
;.&rice is the one actor o demand most likely tomeasurably impact the supplyo a "ood, and thereore
ties to"ether the two sides o the modelow to the supply side o the model
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2.3Supply
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What actors inluence the supply o a "oodor ser%ice(
&rice'um(er o" sellers
&roduction costs /related to production
technolo"y0Sellers7 outside options
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2.3Supply
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+i"ure -.B Supply o )omatoes
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2.3Supply
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We can describe the relationship between the quantity ooran"es supplied /in pounds0 and the price /12pound0 witha supply cur,e
0 400 800 1,200 1,600 Quantity of
oranges (pounds)
Price of oranges
(dollars/pound)
1
2
3
4
5
6
#t prices below 1- per pound, suppliers indit unproitable to sell any oran"es4 this isknown as the supply choke price
#s the price increases beyond 1-, supplierswill pro%ide oran"es to the market
ust as with demand, we connect theobser%ed price5quantity combinations usin"a supply cur,e
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2.3Supply
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We can also describe the supply cur%emathematically
)he supply cur%e on the pre%ious slide is "i%en as
QS= 400P 800
where QSis the quantity o oran"es supplied /inpounds0 and P is the price o oran"es /12pound0
Since we plot price on the %ertical a6is, the in,ersesupply cur,e is "i%en as
P = 2 + 0.0025QS
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2.3Supply
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When a actor aectin" supply other than pricechan"es, the result is a shift in the supply cur%e
Chan$e in +uantity supplied a mo%ement alongthesupply cur%e in response to a price chan"e, withe%erythin" else held constant
Chan$e in supply a shit o the entire supply cur%e
caused by a chan"e in a non5price actor that aectssupply
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2.3Supply
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+i"ure -.= Shits in the Supply Cur%e
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pplication
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Solar panels and polysilicon
Solar ener"y is oten touted as a key in"redient inthe uture o ener"y, but has historically beencost5prohibiti%e
Aecently, prices or solar modules ha%e allenrapidly, pushin" the cost o solar power closer to?"rid parity@
rid parity means solar can compete with other sourceso ener"y on a cost basis
Fne o the key reasons has to do with the cost oproductionGthe price o polysilicon, asemiconductor that is the basis or most solarsystems, dropped more than 9< between -99Hand -9
>ow can we describe this phenomenon usin"
2
Citation: Aoca, M and 8. Sills. o%ember 9, -9. ?Solar lut Worsens as Supply Sur"e Cuts &rices ;
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pplication
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2
0#e solar
capacity(megaatts)
Price of
solar
capacity
($/att)
3
%0 30
Supply curve in 2008
Supply curve in 2011
In &''(, the cost of solarinstallation averaged $3 per att)producers ere illing to supply*' megaatts +" numbers aree!amples"
-s suppliers of polysilicon e!pandcapacity, the cost of this ey inputdrops, shifting the supply of solarenergy out
Producers are illing to supply 3'+ in &'** at a price of $3 peratt
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2.4Market +uili(rium
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Combinin" the descriptions o market supply andmarket demand completes the model
Aemember, supply and demand cur%es relate the price o
a "ood to the +uantity demanded or supplied
)he point at which these two cur%es cross is calledthe market e+uili(rium
Market e+uili(rium occurs when the price o a "ood
results in the quantity demanded equal to the quantitysupplied
+uili(rium price the only price at which the quantitydemanded equals the quantity supplied
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2.4Market +uili(rium
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)he market equilibrium can be identiied mathematically.+or the oran"e e6ample:
QD= 2,400 400P , QS= 400P 800
#t equilibrium, Qe=QD= QS/Qeis equilibrium quantity04 we
sol%e or equilibrium price, Pe,by settin" supply equal to
demand
2,400 400Pe= Qe= 400Pe 800Combinin" terms containin" Peyields
800Pe= 3200 ,Pe= 4
)o ind Qe, substitutePe= 4 into either equation, yieldin"= 800
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2.4Market +uili(rium
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raphically, equilibrium can be ound by plottin"supply and demand to"ether
0 400 &00 %'00 %'00 '000 '400 Quantity of oranges
(pounds)
Price of oranges
(dollars/pound)
%
3
4
5
Demand and supply intersect at
price o 1B.99 per pound ooran"es, resultin" in H99 poundso oran"es bein" sold
)his is the only price that can?clear@ the market>i"her prices: quantity supplied
e6ceeds quantity demanded'ower prices: quantity demandede6ceeds quantity supplied
S
D
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2.4Market +uili(rium
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>ow do markets mo%e toward equilibrium( +irst, i P>Pe, quantity supplied will e6ceed quantity
demanded
E6cess supply is reerred to as surplus)o sell their products, producers must lower prices
#s prices all, quantity demanded increases and quantitysupplied decreases until the market reaches equilibrium
at a lower price
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2.4Market +uili(rium
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Describin" a surplus "raphically
0 400 &00 %'00 %'00 '000 '400 Quantity of oranges
(pounds)
Price of oranges
(dollars/pound)
%
3
4
5
#t a price o 1=, ,-99 pounds aresupplied, but only B99 are demanded
)here is a surpluso H99 pounds
)o reach equilibrium, prices must all,leadin" to a decrease in the quantitysupplied, and an increase in thequantity demanded
S
D
*urplus
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2.4Market +uili(rium
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'ikewise, ifP
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2.4Market +uili(rium
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Describin" a shorta"e "raphically
0 400 &00 %'00 %'00 '000 '400 Quantity of oranges
(pounds)
Price of oranges
(dollars/pound)
%
3
4
5
#t a price o 1;, B99 pounds aresupplied, but ,-99 pounds are
demanded
)here is a shorta$eo H99 pounds
)o reach equilibrium, prices mustrise, leadin" to a decrease in thequantity demanded, and an increasein the quantity supplied
S
D
*+ortage
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Figure it outThe Demand for Gym Memberships
)he supply and demand or monthly "ym
memberships are "i%en as
QS= 10P 300 , QD= 600 10P
WherePis the monthly price, in dollars
ns)er the "ollo)in$ +uestions%.I the current price or memberships is 1=9 permonth, is the market in equilibrium(
-.Would you e6pect the price to rise, or all(
;.I so, by how much(
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Figure it outThe Demand for Gym Memberships
. )wo ways to sol%e the problem
Compute quantity supplied and demanded at a price o1=9, or
Sol%e or the equilibrium price, and compare with 1=9
!sin" the irst method
QS=10P 300 = 10(50) 300 = 200
QD=600 10P = 600 10(50) = 100
QS>QD,and the market is not in equilibrium.
-. What must happen to price(
&rice needs to all* but by how much(
;. Sol%e or equilibrium price and quantity
QS=QD=Q* => 10P* 300 = 600 10P* => P*, $45, Q*, %50
&rice must all by 85, and 59 more memberships are
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2.4
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What happens to the market equilibrium when thereis a shit in demand or supply(
Aemember the actors that can shit the demand cur%e
umber o consumersWealth or income
Consumer tastes
&rices o related "oods /complements or substitutes0
and the supply cur%eumber o producers
Costs o production
&roducer outside options
Market +uili(rium2
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2.4
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+i"ure -. Why PeIs the Equilibrium &rice
Market +uili(rium2
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2.4
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In anuary, -9-, the +D# announced it had detectedlow le%els o carbendazim, a potentially dan"erousun"icide, in samples o oran"e Juice
>ow will this announcement aect the market ororan"es(
Supply side the le%els detected were not suicient toinduce action by +D#4 assume no impact on supply
Demand side bad press can ha%e ne"ati%e impacts ondemand or ood products* what should happen(
Market +uili(rium2
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2.4
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We can describe this "raphically
0 400 &00 %'00 %'00 '000 '400 Quantity of
oranges (pounds)
Price of oranges
(dollars/pound)
%
3
4
5
&rior to the +D#Ks disco%ery, H99 poundso oran"es are sold at 1B per pound
#ter the announcement, demand shitsrom D1to D2
)he new equilibrium occurs when B99pounds are sold at a price o 1; perpound
)here has been a decrease in demandand a decrease in the +uantity o" oran$essuppliedin response to a allin" price
S
D%
Market +uili(rium
D
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Figure it outA Shift in Demand
Draw a supply and demand dia"ram o the market or
"enerators in )ampa, +lorida
ns)er the "ollo)in$ +uestions%
.Suppose a hurricane watch is issued, and someresidents e6pect to lose power. !sin" the supply and
demand dia"ram, show what will happen to theequilibrium price and quantity in the )ampa marketor "enerators
-.Does this chan"e relect a chan"e in demand or a
chan"e in the quantity demanded(
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Figure it outA Shift in Demand
Q1 Q2 Quantity of
generators
Price of
generators
(dollars)
P1
P2
S
D%
D
)he initial equilibriumoccurs at a price o P1and
quantity Q1
When the hurricane watchis issued, demand shitsoutward
)he new price isP2, and the
new quantity is Q2
So, price and quantitye6chan"ed ha%e bothincreased
)his represents a chan$e :orshi"t; in demand
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2.4
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In +ebruary, -9, 8ra$il won a trade dispute with the!.S. re"ardin" imported oran"e Juice, indin" the !.S. wasunairly e6cludin" 8ra$ilian suppliers rom !.S. markets
by use o a tari)he result was more oran"e Juice imported rom 8ra$il
>ow should this announcement aect the market ororan"es(
Demand side this should not aect demandSupply side the rulin" applies to oran"e Juice, notoran"es* what is the dierence(
I applied to oran"es, more sellers supply shits out
#s it applies only to Juice, aects outside opportunities odomestic oran"e producers* what happens(
Market +uili(rium2
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2.4
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We can describe this "raphically
0 400 800 1,200 1,600 2,000 2,400 Quantity of oranges
(pounds)
Price of oranges
(dollars/pound)
1
2
3
4
5
6
With the tari, H99 pounds o oran"es aresold at 1B per pound
When the tari is repealed, domesticoran"e producers shit product rom Juiceprocessors to ruit markets, supply shitsrom S1to S2
ew equilibrium: ,-99 pounds at 1; per
pound
)here has been an increase in supply andan increasein the +uantity o" oran$esdemanded in response to a lower price
S%
D
Market +uili(rium
S
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Figure it outA Shift in Supply
)his summer, you noticed the price o lobster in your
supermarket risin", but also that there was muchmore lobster bein" sold
!sin" a supply and demand dia"ram, what can youiner about this market(
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Figure it outA Shift in Supply
Q1Q2 Quantity of
generators
Price of
generators
(dollars)
P1
P2
D
SS
)he initial equilibriumoccurs at a price o P1and
quantity Q1
What chan"e in supply ordemand would result inprices risin" and quantity
e6chan"ed allin"(
# ne"ati%e shit in supplyL
)he new price isP2, and the
new quantity is Q2
)his represents a chan$e :orshi"t; in supply and a chan"ein the +uantity demanded
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Figure it outThe Demand for Gym Memberships
oin" back to the pre%ious e6ample o "ym
memberships
QS= 10P 300 , QD= 600 10P
ow, suppose the town opens a new communitycenter with a pool and a wei"ht room. #s a result,
consumers demand -99 ewer "ym memberships ate%ery price
ns)er the "ollo)in$ +uestions%
.Write down the new demand equation
-.What do you e6pect to happen to the equilibriumprice and quantity /remember, pre%iously P*, $45, Q*,%50"/
;.Compute the new equilibrium price and quantity.
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Figure it outThe Demand for Gym Memberships
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2.4
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Market +uili(rium
Summary o the eect o a shit in supply or demandon market equilibrium
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2.4
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What determines the ma"nitude o the chan"e inequilibrium price and quantity(
)wo important parameters
Si
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2.4
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Consider an outward shit in supply /increase0
Market +uili(rium
0 Quantity
Price
D
-Q
S% S
Demand has relati,ely steep slope% shit insupply results inlargechan"e in price and
small chan"e in quantity e6chan"ed
Demand has relati,ely shallo) slope% thesame shit in supply results in smallchan"e in price andlarge chan"e inquantity e6chan"ed
-P
D
-P
-Q
2
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2.4
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+i"ure -. Si$e o Equilibrium &rice and uantity Chan"es,and the Slopes o the Supply and Demand Cur%es
Market +uili(rium2
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2.4
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Sometimes, supply and demand shit simultaneously
urricane =atrina and the 'e) Orleans housin$ market
Natrina destroyed many homes* what happens tosupply(
)he hurricane displaced thousands o residents, manyha%e not returned* what happens to demand(
>ow will these shits aect the housin" marketequilibrium in ew Frleans(
Market +uili(rium2
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2.4
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>urricane Natrina and the ew Frleans housin"market
Market +uili(rium
0 Quantity
Price S2 S1 )he hurricane shits supply anddemand inward. )he result is a lar"edrop in quantity, and a small drop inprice
>owe%er, without speciic inormationon shits and slopes o supply anddemand, we cannot know or surewhat happens to price
E6ample: Consider smaller demandshit4 quantity still alls, but price hasrisen sli"htlyL
P
Q
D2 D1
P
Q
D2
2
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2.5lasticity
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)he slopes o the supply and demand cur%esdetermine how markets respond to shits in supplyand demand
Steep cur,es%large chan"es in price and small chan"es inquantity, all else equal
Shallo) cur,es% small chan"es in price andlarge chan"es inquantity, all else equal
2
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2.5lasticity
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lasticity
!nit5less measure that describes the sensiti%ity oquantity demanded or supplied
&ercenta"e chan"e in one %ariable /e."., quantity0di%ided by the percenta"e chan"e in another /e."., price0
2
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2.5lasticity
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&rice elasticity o" demand% percenta"e chan"e inquantity demanded di%ided by percent chan"e inprice
&rice elasticity o" supply: percenta"e chan"e inquantity supplied di%ided by percent chan"e in price
ED
=
!QD
!P
ES =!QS
!P
2
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2.5lasticity
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When price elasticity o demand is hi$h*Aelati%ely small increases in price result in relati%ely lar"edrops in quantity demanded
E6amples(
McDonaldKs hambur"ers
When price elasticity o demand is lo)*Aelati%ely lar"e increases in price result in relati%ely smalldrops in quantity demanded
E6amples(
asoline
2
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2.5lasticity
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What %ariables aect the elasticity o demand(
)hea,aila(ility o" close su(stitutes
/readth o the market
0ype o" product /e."., necessity or lu6ury item0&ercenta$e o" incomespent on the "ood
0ime hori
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2.5lasticity
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)erminolo"ylastic%Demand is elastic i .ED. %
>nit elastic% Demand is unit elastic i .ED. , %
Inelastic% Demand is inelastic i 0 .ED. %
&er"ectly elastic% Demand is perectly elastic i .ED. , 1
&er"ectly inelastic% Demand is perectly inelastic i .ED. , 9
Important% Elasticities do not ha%e units attached4can be compared across dierent "oods andser%ices in dierent markets, and also used todescribe supply
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pplication
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0he price o" $as and tra""ic con$estion
8ur"er and Naine /-990 in%esti"ate "as prices,hi"hway speed, and con"estion in 'os #n"eles between-99 and -993
In theory, hi"her "asoline prices should reduce hi"hwayspeeds because dri%in" slowly tends to increaseeiciency
)he authors ind dri%ers do not slow down when traic isli"ht4 howe%er, durin" rush hour, a%era"e speeds actuallyincrease /about ;.; miles per hour or e%ery
1.992"allon0
)hey attribute this to reduced con"estion4 dri%ersrespond to hi"h prices by takin" ewer trips, or usin"public transportation
#ccountin" or the relationship between %ehicle miles
tra%elled /7M)0 and con"estion, the authors estimate theprice elasticity o demand or 7M) to be appro6imately
2
Citation: 8ur"er, .E. and D.). Naine. -99. ?as &rices, )raic, and +reeway Speeds in 'os#n"eles.@ he !eview of Economics and "tatistics /;0: 3=-53= Image: FreeDigitalPhotos.net
Image: FreeDigitalPhotos.net
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2.5lasticity
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lasticities and linear demand and supply
We oten assume demand and supply are linear, so knowin"how to calculate elasticity on a linear cur%e is important
Equation or price elasticity /demand or supply0
or,
Mo%in" up or down a linear supply or demand cur%e, the ratioQ/P is equal to 1/slope
E=!Q
!PE=
Q / Q
P/P
E= Q / Q
P/P=
Q
P
P
Q=
1
slope
P
Q
2
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2.5lasticity
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&rice elasticity o" demand "or a linear demand cur,e
0 400 800 1,200 1,600 2,000 2,400 Quantity of oranges
(pounds)
Price of oranges
(dollars/pound)
1
2
3
4
5
6
-t the top of our demand curve,
perfectly elastic"===
0
"#00
1
D
D
Q
P
slopeE
elastic"2
$00
##00 ==DE
unit elastic"
3#00 1
1,200
DE = =
inelastic"
2#00 0%&1,"00
D
E = =
perfectlyinelastic"
0#00 0
2,#00
DE = =
2
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2.5lasticity
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#s you mo%e down a demand cur%e, demand becomesless elastic, e%entually perectly inelastic at the hori$ontala6is
D
D
D
QP
PQE
=
0lope is constant along
the demand curve
P/Q falls as you move don the
demand curve
2
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2.5 lasticity
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&rice elasticity o" supply "or a linear supply cur,e
elastic""
#00 1%&1,"00
SE = =
elastic"
1%"'
1, 200
SE = =
elastic"E
S=#00
#
$00=2
elastic"
ES =#00 3
#00
= 3
-t the bottom of the supply curve,
perfectly elastic"ES =
1
slope
P
QS =#00
2
0=
0 400 800 1,200 1,600 Quantity of
oranges (pounds)
Price of oranges
(dollars/pound)
1
2
3
4
5
6
2
Figure it out
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Figure it outThe Elasticity of Demand for Movie Tickets
)he demand or mo%ie tickets in a small town is "i%en
as
QD= 1,000 50P
ns)er the "ollo)in$ +uestions%
.Calculate the price elasticity o demand when theprice o tickets is 1=
-.Calculate the price elasticity o demand when theprice o tickets is 1-
;.#t what price is the price elasticity o demand unitelastic!
B.What happens to the price elasticity o demand asyou mo%e down a linear demand cur%e(
Figure it out
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Figure it outThe Elasticity of Demand for Movie Tickets
. )he price elasticity o demand is "i%en as
#t 1=, is constant /linear demand cur%e0
#t a price o 1=,
)hereore,
#nd, demand is
Inelastic
D
DDDD
Q
P
P
Q
PP
QQE
=
=
/
/
QD
P= &0
1&0
1
(&)&01000
&=
=DQ
P
33333%01&0
1&0 ==
=
D
DD
Q
P
P
QE
Figure it out
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Figure it outThe Elasticity of Demand for Movie Tickets
12 3
1, 000 &0 )12( 100DP
Q= =
&%1
100
3&0 ==
=
D
DD
Q
P
P
QE
Figure it out
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Figure it outThe Elasticity of Demand for Movie Tickets
;. #t what price is demand unit elastic(
/!nit elastic impliesED= 10
)o sol%e or the correct price, use the equation orelasticity o demand
Multiply both sides by 1,000 50P
#nd combine terms, yieldin" a price oP =19
B. What happens to the elasticity o demand as youmo%e downa linear demand cur%e(
Demand becomes less elastic
1 &0
1, 000 &0
P
P
=
&0 1, 000 &0P P =
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2.5lasticity
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&er"ectly inelastic demand and supplyImplies quantity demanded2supplied does not chan"e inresponse to a chan"e in price
E6ample: lie5sa%in" dru"s /near5perectly inelasticdemand0
&er"ectly elastic demand and supplyImplies the quantity demanded2supplied is infinitely
responsi%e to miniscule chan"es in priceE6ample: Commodity crops /near5perectly elasticdemand0
2
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2.5lasticity
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0Quantity
Price
When is demand2supply perectlyinelastic /E = 00(
WhenP = 0 /hori$ontal a6is0
When the slope o demand2supply is
ininite
When is demand2supply perectlyelastic /E = 0(
When Q = 0 /%ertical a6is0
When the slope o demand2supply is$ero
Q
P
slopeE =
1
01 =
=QPE
==
Q
PE
0
1
2
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2.5
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Demand elasticity aects consumer e6penditures orproducts
Ae%enue OP Q
ED
is the ratio o the percenta"e chan"e in quantitydemanded to the percenta"e chan"e in price.
I demand is inelastic, a < increase in price reduces demand bylessthan
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2.5
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0 400 800 1,200 1,600 2,000 2,400 Quantity of
oranges (pounds)
Price of oranges(dollars/pound)
1
2
3
4
5
6
lasticity
Quantity of
oranges (pounds)
!"#$l e%pen&i#ure' = #"#$l revenue =P Q
2,000
3,200
3,600
0 400 800 1,200 1,600 2,000 2,400
ni# el$'#ic
2
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EID
=
!QD
!I = QD / QD
I/I
2
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2.5lasticity
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2+i"ure -. E6penditures alon" a 'inear Demand
Cur%e
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2.5lasticity
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EXYD
=!QX
D
!PY=
QXD
/ QXD
PY /PY
2
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2
Citation: allet, C.#. and .#. 'ist. H. ?Elasticities o 8eer Demand Ae%isited.@ Economics #etters3: 35
Image: FreeDigitalPhotos.net
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2
Citation: allet, C.#. and .#. 'ist. H. ?Elasticities o 8eer Demand Ae%isited.@ Economics #etters3: 35
Image: FreeDigitalPhotos.net
Image: FreeDigitalPhotos.net
What mi"ht e6plain chan"es in elasticities o%er time(
Consumer tastes% release o inormation re"ardin"ne"ati%e health eects be"innin" in the 9s mayha%e led to reduced demand
Increased proportion o drinkers who are less healthconscious and2or addicti%e in nature
E%idence su""ests hea%y drinkers are less price5sensiti%e to alcohol, hence the chan"e to inelastic
&oorer consumers are "enerally ha%e less educationand are less health conscious, hence the mo%e to aninerior "ood
Chan"e in beer5wine relationship rom substitutes tounrelated "oods perhaps due to increased productdierentiation /e."., microbreweries, lite beers0 in thebeer industry
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2.6Conclusion 2