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CHAPTER 2 Microeconomics Ppt (3)

Chapter 2 discusses the fundamentals of supply and demand, highlighting the positive relationship between price and supply, and the negative relationship between price and demand. It explains various factors affecting supply and demand, introduces the concept of market equilibrium, and covers different types of elasticities including price, income, and cross-price elasticities. The chapter also examines the effects of changing market conditions and government interventions such as price controls.

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5 views

CHAPTER 2 Microeconomics Ppt (3)

Chapter 2 discusses the fundamentals of supply and demand, highlighting the positive relationship between price and supply, and the negative relationship between price and demand. It explains various factors affecting supply and demand, introduces the concept of market equilibrium, and covers different types of elasticities including price, income, and cross-price elasticities. The chapter also examines the effects of changing market conditions and government interventions such as price controls.

Uploaded by

abulnurassyl581
Copyright
© © All Rights Reserved
We take content rights seriously. If you suspect this is your content, claim it here.
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Download as PPTX, PDF, TXT or read online on Scribd
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CHAPTER 2

The Basics of Supply


and Demand
The supply curve: the positive relationship
between the quantity of a good that producers are
willing to sell and the price of the good.
 Price
 Supply Variables that effect the supply
curve:
 1. Costs of raw materials
 P Supply’ 2. Production costs
 P’ 3. Interest charges

 Q Q’ Quantity
The Demand Curve: Negative relationship
between the quantity of a good that consumers are
willing to buy and the price of a good
 Price
 Variables that effect demand
curve:
 1. Income
 2. Prices of related goods
 A 3. Tastes, Culture, Mentality
 4. Weather, season
 B Demand’ 5. Expectations
 Demand
 Q1 Q2 Quantity
The market mechanism: tendency in a
free market for price to change until the
market clears
 Price

 Supply Surplus=excess supply


 Surplus Shortage= excess demand
 Market clearing=equilibrium
 Market clearing

 Shortage
 Demand

 Quantity
Elasticities of supply and demand: elasticity
measures the sensitivity of one variable to
another
 Price elasticity of demand: measures the sensitivity of Qd to price
changes
 Ep=% change in Qd /% change in P
 or
 P/Qd multiplied by change in Qd / change in P

 IF Ep>1 price elastic, close substitutes


 IF Ep<1 price inelastic, no close substitutes
Price Elasticity of Demand

 Price Price
 Demand

 Demand

 Quantity
Quantity
 Infinitely elastic demand Completely inelastic
demand
Income Elasticity of Demand:

 This is percentage change in the Qd


resulting from 1% increase in income
 or
 Measures sensitivity of Qd to changes in
income

 Income elasticity formula = I/Qd multiplied by change in Qd/change in


Income
Cross price Elasticity:

 This is the percentage change in Qd for a good that results from a 1%


increase in the price of another related product. Example:

 Substitutes: pepsi or coca cola


 Complements: software and hardware

 Formula: Elasticity of Ppepsi and Qcola= Pp/Qc * change in Qc /


change in Pp
Point Elasticity:
 This is price elasticity at a particular point on the demand curve
 Formula: P/Q * 1/slope

Arc Elasticity:
 Price elasticity calculated over a range of prices
 Formula: change in Qd/change in P * average P/average Qd
Short Run versus Long Run
Elasticities
Demand: durables, nondurables
 Example:
 Nondurables: Gasoline, coffee, hamburger, e.t.c.
 If the price of gasoline sharply increases in the short run motorists
will drive less, but in the long run they will shift to smaller, fuel-
efficient cars. So, for nondurables demand is more elastic in the long
run.

 Durables: Frige, automobile, TV, e.t.c.


 If Pcars wil increase sharply in the short run people will not buy car,
they will wait, but in the long run they should wear out old cars, so
Qd for cars will increase but not so much. As a conclusion, for
durables demand is more elastic in the short run.
Income Elasticities in the short run
and in the long run

IE is more elastic in the short run for durables, because people try to
realise dream when they become richer.

IE is more elastic in the long run for nondurables, because changing


consumers confidence takes time.
Price Elacticity of Supply: shows sensitivity
of supply by 1% change in price

 Supply: Primary Supply, Secondary Supply


 Price elasticity of supply is generally more elastic in the long run, but
especially primary supply is more elastic in the long run because of
capacity constraints.
 Capacity constraints: expand capital, hiring professionals, building
factory, etc.
 Price elasticity of supply of secondary raw materials is more elastic in
the short run, but its costly because of some procedures like, melting,
refablicating scrap metal to convert it into new supply
Understanding and predicting the effects
of changing market conditions
 Demand:Qd=a-bP Qd= Qs
 Supply: Qs=c+dP
 Step1:
 In Elasticity formula delta Q /delta P part is fixed for linear curves so,
for demand it is –b, for supply it is d
 Ed=-b*(P/Q) for demand
 Es= d*(P/Q) for supply
 Step2:
 Q=7,5 mln metric tons p/year
 P=$0,75p/pound
 Es=1,6
 Ed=-0,8 FIND a,b,c,d,?
Example:
 Demand depends on income, so we can write like:
 Qd=a-bP+fI
 I is aggregate income
 I=1,0
 Ei=1,3
 derivative part of the elasticity formula is fixed and it is f
 FIND f?
 Ei=f*I/Qd 1,3=f*1,0/7,5
 f=(1,3*7,5)/1,0=9,75

 b=8
 f=9,75
 a=? Find a? Qd=a-bP+fI 7,5=a-8*0,75+9,75*1,0
 a= 3,75
Effects of government intervention – Price
controls

 Price

 Supply

P1
P2(price ceiling)
 shortage Demand

 Quantity

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