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MicroEconomics theory and application 12th by browning an zupan chapter 02

Prepared by Dr. Della Lee Sue, Marist College

MICROECONOMICS: Theory & Applications
Chapter 2: Supply and Demand
By Edgar K. Browning & Mark A. Zupan
John Wiley & Sons, Inc.
12th Edition, Copyright 2015

Copyright © 2015 John Wiley & Sons, Inc. All rights reserved.


Learning Objectives










Understand how the behavior of buyers and sellers can be characterized
through demand and supply curves.
Explain how equilibrium price and quantity are determined in a market
for a good or service.
Analyze how a market equilibrium is affected by changes in demand or
supply.
Explore the effects of government intervention in markets and how a
price ceiling impacts price, quantity supplied, quantity demanded, and
the welfare of buyers and sellers.
Show how elasticities provide a quantitative measure of the
responsiveness of quantity demanded or supplied to a change in some
other variable such as price or income.
Explain the mathematics associated with elasticities.
Copyright © 2015 John Wiley & Sons, Inc. All rights reserved.

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Understand how the behavior of buyers and sellers can be characterized
through demand and supply curves.

2.1 DEMAND AND SUPPLY CURVES

Copyright © 2015 John Wiley & Sons, Inc. All rights reserved.

3


Demand and Supply Curves






Supply-demand model: competitive interaction of sellers
and buyers
Determination of market price and quantity
Response to changes in other economic variables
Incorporate forms of government intervention, such as price
controls
Quantitative as well as qualitative market changes

Copyright © 2015 John Wiley & Sons, Inc. All rights reserved.

4


The Demand Curve





LAW OF DEMAND: the lower the price of a good, the
larger the quantity consumers wish to purchase
“Demand” versus “Quantity demanded”
Negatively slope
Assumption: all other factors remain constant

Copyright © 2015 John Wiley & Sons, Inc. All rights reserved.

5


Figure 2.1 – A Demand Curve

Copyright © 2015 John Wiley & Sons, Inc. All rights reserved.

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Determinants of Demand
Other Than Price






Income
 Normal goods
 Inferior goods
Prices of related good
 Complements
 Substitutes
Tastes or preferences

Copyright © 2015 John Wiley & Sons, Inc. All rights reserved.

7


Drawing a Demand Curve


Graph:
 “Quantity” is measured along the horizontal axis
 “Price” is measured along the vertical axis
 Other factors (incomes, prices of related goods, and
preferences) – same at all points on the curve
 Law of Demand: demand curve slopes downward

Copyright © 2015 John Wiley & Sons, Inc. All rights reserved.

8


Shifts in versus Movements along a
Demand Curve


Movement along a demand curve:
 a change in quantity demanded in response to a change
in the good’s own price, other factors held constant
 Movement up curve: increase in good’s own price
 Movement down curve: decrease in good’s own price



Shift of a demand curve:
 a change in the demand curve in response to a change in
income, prices of related goods, or preferences
 Rightward shift: increase in demand
 Leftward shift: decrease in demand

Copyright © 2015 John Wiley & Sons, Inc. All rights reserved.

9


Figure 2.2 - An Increase in Demand

Copyright © 2015 John Wiley & Sons, Inc. All rights reserved.

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The Supply Curve





Law of Supply: the higher the price of a good, the larger
the quantity firms want to produce
“Supply” versus “Quantity supplied”
Upward slope
Assumption: all other factors remain constant

Copyright © 2015 John Wiley & Sons, Inc. All rights reserved.

11


Figure 2.3 – A Supply Curve

Copyright © 2015 John Wiley & Sons, Inc. All rights reserved.

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Determinants of Supply
Other Than Price







Technological knowledge
Cost and productivity of inputs
Expectations
Employee-management relations
Goals of firms’ owners
Government taxes or subsidies

Copyright © 2015 John Wiley & Sons, Inc. All rights reserved.

13


Drawing a Supply Curve


Graph:
 “Quantity” is measured along the horizontal axis
 “Price” is measured along the vertical axis
 Other factors (incomes, prices of related goods, and
preferences) – same at all points on the curve
 Law of Supply: supply curve slopes upward

Copyright © 2015 John Wiley & Sons, Inc. All rights reserved.

14


Shifts in versus Movement along a
Supply Curve




Movement along a supply curve:
 reflects a change in the good’s selling price
 Movement up curve: increase in good’s selling price
 Movement down curve: decrease in good’s selling
price
Shift in the supply curve:
 reflects a change in the state of technological knowledge
or the conditions of supply of inputs
 Rightward shift: increase in supply
 Leftward shift: decrease in supply

Copyright © 2015 John Wiley & Sons, Inc. All rights reserved.

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Figure 2.4 - An Increase in Supply

Copyright © 2015 John Wiley & Sons, Inc. All rights reserved.

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Explain how equilibrium price and quantity are determined in a market
for a good or service.

2.2 DETERMINATION OF
EQUILIBRIUM PRICE AND QUANTITY

Copyright © 2015 John Wiley & Sons, Inc. All rights reserved.

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Determination of Equilibrium Price and
Quantity


Equilibrium
 a situation in which quantity demanded equals quantity
supplied at the prevailing price
 occurs at the intersection between the supply and
demand curves
 Equilibrium point: equilibrium price, equilibrium
quantity

Copyright © 2015 John Wiley & Sons, Inc. All rights reserved.

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Figure 2.5 - Determination of
Equilibrium Price and Quantity

Copyright © 2015 John Wiley & Sons, Inc. All rights reserved.

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Disequilibrium


Disequilibrium – a situation in which the quantity
demanded and the quantity supplied are not in balance
 Shortage
 excess demand for a good: quantity demanded>
quantity supplied
 market forces tend to exert upward pressure on price
 Surplus
 excess supply of a good: quantity supplied> quantity
demanded
 market forces tend to exert downward pressure on
price
Copyright © 2015 John Wiley & Sons, Inc. All rights reserved.

20


Analyze how a market equilibrium is affected by changes in demand or
supply.

2.3 ADJUSTMENT TO CHANGES IN
DEMAND OR SUPPLY

Copyright © 2015 John Wiley & Sons, Inc. All rights reserved.

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Adjustment to Changes in Demand or
Supply


application of the supply and demand model



explain or predict how a change in market conditions affects
equilibrium price and output

Copyright © 2015 John Wiley & Sons, Inc. All rights reserved.

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Figure 2.6 – Market Adjustments to
Changes in Demand and Supply

Copyright © 2015 John Wiley & Sons, Inc. All rights reserved.

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Using the Supply-Demand Model to
Explain Market Outcomes
Explaining market outcomes: (steps)
1.
Determine how the equilibrium in a market has
changed
2.
Has demand or supply produced the new market
outcome?
3.
Isolate the factor that produced the observed change in
market outcome

Copyright © 2015 John Wiley & Sons, Inc. All rights reserved.

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Figure 2.7 - Using the Supply-Demand
Model to Explain Market Outcomes

Copyright © 2015 John Wiley & Sons, Inc. All rights reserved.

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