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CHAPTER DEMAND AND SUPPLY © 2011 Pearson Education Demand and Supply CHAPTER CHECKLIST When you have completed your study of this chapter, you will be able to Distinguish between quantity demanded and demand, and explain what determines demand Distinguish between quantity supplied and supply, and explain what determines supply Explain how demand and supply determine price and quantity in a market, and explain the effects of changes in demand and supply © 2011 Pearson Education CHAPTER CHECKLIST When you have completed your study of this chapter, you will be able to Explain how a price ceiling works and show how a rent ceiling creates a housing shortage, inefficiency, and unfairness Explain how a price floor works and show how the minimum wage creates unemployment, inefficiency, and unfairness Explain how taxes change prices and quantities, are shared by buyers and sellers, and create inefficiency © 2011 Pearson Education CHAPTER CHECKLIST When you have completed your study of this chapter, you will be able to 7 Define, explain the factors that influence, and calculate the price elasticity of demand 8 Define, explain the factors that influence, and calculate the price elasticity of supply Define and explain the factors that influence the cross elasticity of demand and the income elasticity of demand © 2011 Pearson Education COMPETITIVE MARKETS A market is any arrangement that bring buyers and sellers together A market might be a physical place or a group of buyers and sellers spread around the world who never meet COMPETITIVE MARKETS In this chapter, we study a competitive market that has so many buyers and so many sellers that no individual buyer or seller can influence the price 2.1.1 DEMAND Quantity demanded is the amount of a good, service, or resource that people are willing and able to buy during a specified period at a specified price The quantity demanded is an amount per unit of time For example, the amount per day or per month 2.1.1 DEMAND ! Law of Demand Other things remaining the same, • If the price of the good rises, the quantity demanded of that good decreases • If the price of the good falls, the quantity demanded of that good increases 2.1.1 DEMAND ! Demand Schedule and Demand Curve Demand is the relationship between the quantity demanded and the price of a good when all other influences on buying plans remain the same Demand is a list of quantities at different prices and is illustrated by the demand curve 2.1.1 DEMAND Demand schedule is a list of the quantities demanded at each different price when all the other influences on buying plans remain the same Demand curve is a graph of the relationship between the quantity demanded of a good and its price when all other influences on buying plans remain the same 2.4.2 THE PRICE ELASTICITY OF SUPPLY ! Influences on the Price Elasticity of Supply The two main influences are: • Production possibilities • Storage possibilities Production Possibilities Goods that can be produced at a constant (or very gently rising) opportunity cost have an elastic supply Goods that can be produced in only a fixed quantity have a perfectly inelastic supply 2.4.2 THE PRICE ELASTICITY OF SUPPLY Time Elapsed Since Price Change As time passes after a price change, producers find it easier to change their production plans, so supply becomes more elastic Storage Possibilities The supply of a storable good is highly elastic The cost of storage is the main influence on the elasticity of supply of a storable good 2.4.2 THE PRICE ELASTICITY OF SUPPLY ! Computing the Price Elasticity of Supply Price elasticity = of supply Percentage change in quantity supplied Percentage change in quantity price • If the price elasticity of supply is greater than 1, supply is elastic • If the price elasticity of supply equals 1, supply is unit elastic • If the price elasticity of supply is less than 1, supply is inelastic 2.4.2 THE PRICE ELASTICITY OF SUPPLY Figure 5.6 shows how to calculate the price elasticity of supply Percentage change in the price equals $60/$40 × 100, or 66.67% Percentage change in the quantity equals 18 bouquets/15 bouquets × 100, or 120% 2.4.2 THE PRICE ELASTICITY OF SUPPLY The price elasticity of supply equals the Percentage change in the quantity ÷ Percentage change in the price The price elasticity of supply equals 120% ÷ 66.67% The price elasticity of supply is 1.8 2.4.3 CROSS ELASTICITY AND INCOME ELASTICITY ! Cross Elasticity of Demand Cross elasticity of demand is a measure of the extent to which the demand for a good changes when the price of a substitute or complement changes, other things remaining the same Cross elasticity of demand = Percentage change in quantity demanded of a good Percentage change in the price of one of its substitutes or complements 2.4.3 CROSS ELASTICITY AND INCOME ELASTICITY Suppose that when the price of a burger falls by 10 percent, the quantity of pizza demanded decreases by percent Cross elasticity of demand = – percent – 10 percent = 0.5 2.4.3 CROSS ELASTICITY AND INCOME ELASTICITY The cross elasticity of demand for a substitute is positive • A fall in the price of a substitute of the good brings a decrease in the quantity demanded of the good • The quantity demanded of the good and the price of its substitute change in the same direction 2.4.3 CROSS ELASTICITY AND INCOME ELASTICITY The cross elasticity of demand for a complement is negative • A fall in the price of a complement of the good brings an increase in the quantity demanded of the good • The quantity demanded of the good and the price of one of its complements change in opposite directions 2.4.3 CROSS ELASTICITY AND INCOME ELASTICITY Figure 5.7 shows cross elasticity of demand Pizzas and burgers are substitutes When the price of a burger falls, the demand for pizza decreases Cross elasticity of demand is positive 2.4.3 CROSS ELASTICITY AND INCOME 5.3 CROSS ELASTICITY AND INCOME ELASTICITY ELASTICITY Figure 5.7 shows cross elasticity of demand Pizzas and soda are complements When the price of soda falls, the demand for pizza increases Cross elasticity of demand is negative 2.4.3 CROSS ELASTICITY AND INCOME ELASTICITY ! Income Elasticity of Demand Income elasticity of demand is a measure of the extent to which the demand for a good changes when income changes, other things remaining the same Income elasticity of demand = Percentage change in quantity demanded Percentage change in income ... many buyers and so many sellers that no individual buyer or seller can influence the price 2.1.1 DEMAND Quantity demanded is the amount of a good, service, or resource that people are willing... available 2.1.1 DEMAND 2.1.1 DEMAND ! Change in Quantity Demanded Versus Change in Demand A change in the quantity demanded is a change in the quantity of a good that people plan to buy that... remaining the same, • If the price of the good rises, the quantity demanded of that good decreases • If the price of the good falls, the quantity demanded of that good increases 2.1.1 DEMAND ! Demand