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supply and demand

economics extra credit samuelson chapter 3+4

eve chen

on 8 June 2010

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Transcript of supply and demand

Basic Elements of Supply and Demand Application of Supply and Demand Chapter 3 Samuelson Book Samuelson Book
Chapter 4 Demand Supply Demand and Supply?? why is the demand curve downward sloping?? Law of downard sloping demand When the price of a commodity is raised,
consumers tend to buy less of the commodity,
when the price is lowered,
quantity demanded increase (and other things are held constant) Market Demand represents? the sum total of all individual demands What are the forces behind the Demand Curve? income as people's income rise,
individual tend to buy more of almost everything,
even prices don't change size of market population more people means more demand prices and availabilty of related goods what are the two types of related goods? complemntary goods
substitutes as price of its complementary goods
the quantity demanded of the commodity as price of its substitutes increase
decrease increase decrease the quantity demanded of the commodity increase increase decrease decrease tastes or preferences special influences interest rate factors affect the demand for particular goods for example, weather high temperature demand for ice-cream increases higher interest rate people tend to save more
and borrow less demand for some goods will decrease less essential and are at higher % of people income e.g. travelling, cars contraction or extension of demand or supply? when the demand or supply
move along the demand or supply curve contraction of demand extension of supply why is the supply curve upward sloping? When the price of a commodity is raised,
producers tend to produce more of the commodity,
when the price is lowered,
quantity supplied tend to decrease one important reason the law of diminishing return for example if society wants more apples
by rasing the price of apple,
society can persuade apple producers to produce and sell more then additional labour will have to be added to limited land site suitable for producing apples
each new workers will be adding less and less extra product,
What are the forces
behind the Supply Curve Technology Input prices Prices of related goods Government policy Special influences technological advances lower the quantity of inputs needed
to produce the same quantity ofoutput lower production cost increase in supply e.g. lower oil price, lower wage substitutes complementary goods joint supply as price of its complementary goods as price of its substitutes as price of its joint supply increase

decrease increase

decrease the quantity supplied of the commodity increases decreases decreases decreases increases increases the quantity supplied of the commodity the quantity supplied of the commodity taxes and minimum wage raise productions costs decrease in supply subsidies reduce production costs increase in supply environmental and health consideration influecnes the technology use trade policy if free trade total supply increases (+imports) weather for example drought supply of crops decreases expectations about future prices expectations about future prices market equilibirum comes at price at which quantity demanded equals quantity supplied
at equilibrium, no tendency for price to rise or fall market equilibrium surplus shortage intersection of the supply and demand curves effect of a shift in supply or demand D' P P' Q Q' new equilibrium Q' Q P P' new equilibrium S' If there is a decrease in supply If there is an increase in demand market quantity decreases, market price increases market quantity increases, market price increases the price needed to coax out additional apple out put is there fore higher
decrease 1 2 3 4 5 ? Again? price elasticity of demand %change in Q demanded / %change in price PED price elastic price inelastic unit-elastic special cases >1 <1 =1 perfectly inelastic perfectly elastic =infinity =0 effects on revenue?? increase price
revenue rises price changes
revenue stays the same increase price
revenue falls factors influence PED 1 2 3 4 5 6 subsitutes the more and closer the substitutes available,
the higher the elasticity is likely to be,
as people can easily switch from one good to another if an even minor price change is made % of income the higher the percentage of the consumer's income that the product's price represents, the higher the elasticity,
as people will pay more attention when purchasing the good because of its cost necessity the more necessary a good is, the lower the elasticity,
as people will attempt to buy it no matter the price an attachment to a certain brand
can override sensitivity to price changes,
resulting in more inelastic demand Brand Loyalty Who pays where the purchaser does not directly pay for the good they consume,
such as with corporate expenses,
there is likely to be more inelastic demand duration for most goods, the longer a price change holds,
the higher the elasticity,
as more and more people will stop demanding the good price elasticity of supply %change in Q supplied / %change in price 4 3 factors influence PES 5 2 1 Availability of raw materials for example,
availability may cap the amount of gold that can be produced in a country regardless of price. Length and complexity of production Time to respond Much depends on the complexity of the production process. Textile production is relatively simple.
Thus the PES for textiles is elastic. The more time a producer has to respond to price
changes the more elastic the supply Supply is normally more elastic in the long run than in the short run for produced goods
since it is generally assumed that in the long run all factors of production can be utilised to increase supply,
whereas in the short run only labor can be increased,
and even then, changes may be prohibitively costly Excess capacity A producer who has unused capacity can quickly respond to price changes in his market assuming that variable factors are readily available Inventories A producer who has a supply of goods or available storage capacity can quickly increase supply to market impact of some government interventions on demand and supply tax price ceiling price floor EXTRA ! yoyo 2 years old
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