Chapter 4

Introduction to the Demand and Supply Framework

Supply (cont’d)

• Supply Schedule—a table that shows the quantity firms are willing and able to supply at various prices.

• Supply Curve—a graph that shows the quantities that sellers are willing and able to supply at different prices.

Theory in Action…• http://www.economist.com/world/na/displaystory.cfm?

story_id=8570280 Dreams of Californication Applied Topics: Supply and demand model, changes in market equilibrium

• The article examines the effects of migration of Californians to other parts of the U.S.

• Questions:

• Which determinant of demand identified in the article has changed in the housing market in Salt Lake City and how has it affected the demand curve for housing?

• Does it appear that there has been an increase in supply or an increase in quantity of new houses supplied in Salt Lake City between 2005 and 2006?

Changes in Demand or Supply

• Once an equilibrium price is established, it won’t change unless surrounding (supply and demand) conditions change.

• What happens if Demand decreases

Demand increases

Supply increases

Fill in the Chart….Changes in Demand or Supply

EquilibriumPrice

EquilibriumQuantity

Demand Increases

Demand Decreases

Supply Increases

SupplyDecreases

Fill in the Chart….Changes in Demand or Supply

EquilibriumPrice

EquilibriumQuantity

Demand IncreasesRises Rises

Demand DecreasesFalls Falls

Supply Increases Falls Rises

SupplyDecreases Rises Falls

Changes in Demand and Supply

• When both curves shift, the resulting changes in equilibrium price and quantity are harder to predict. Depends on the direction and magnitude of the

shifts Draw it…

• Demand increase > Supply decrease

• Demand decrease < Supply increase

• Demand increase = Supply increase

Limits of Supply and Demand Analysis

• Thin Markets Buyers and sellers are not in close contact. Very few buyers or sellers

• Output of Some Markets Cannot Be Measured Education

• Fluctuating Market Conditions Using a static model (point in time) to analyze

dynamic markets (over time)

Chapter 4 Homework

• Questions 4, 8, 10, 16, and 18

Chapter 5

Elasticity

Defining a Market

• Allows buyers and sellers to exchange goods and services

• Market edges defined by: Geography

• What kind of market is Wendy’s in? Local, national, international?

Product Characteristics• Size, color, flavor, price…

Are McDonalds and Longhorn Steakhouse in the same market?

Elasticity

• Response of one variable to a change in another variable

• Price elasticity of demand Measure how sensitive consumers are to price

changes

P

QEd

%

%

Elasticity = percentage change in quantity demanded divided by the percentage change in price

Midpoint Formula

2

2

21

21

21

21

PPPP

QQQQ

E

dd

dd

d