ANNOUNCEMENT: FIRST EXAMINATION

THE FIRST UNIT EXAM WILL BE ON December 10, 2010 (FRIDAY) TENTATIVE DATE EXAMS BEGIN 30 MINUTES EARLIER, FROM 7:30 A.M. AND END AT 9 A.M. ROOMS TO BE ANNOUNCED.
1

ANNOUNCEMENTS (#2):
Examples of TEST QUESTIONS in the previous semesters and years are available at the reserve section of the UP School of Economics LIBRARY. A recent exam will be posted in UVLE.
Nov. 30, 2010 Econ 11 -- Lecture #7 2

Lecture #7:

SUPPLY & DEMAND

MARKET EQUILIBRIUM OF in demand SUPPLY AND DEMAND Shifts(changes) and supply CHANGES IN MARKET S&D AND WHAT HAPPENS TO PRICE Demand and Supply of AND QUANTITY Equilibrium ELASTICITY AND ITS MEANING
Nov. 30, 2010 Econ 11 -- Lecture #7 3

performance with respect to changes on how you move from one level to another

HOW SUPPLY AND DEMAND SETTLE AT MARKET EQUILIBRIUM

Nov. 30, 2010 Econ 11 -- Lecture #7 4

SUPPLY AND DEMAND

PRICE D S

P0 Market equilibrium settles at price P0 and quantity Qo..

Nov. 30, 2010

0
Econ 11 -- Lecture #7

Q
0

QUANTITY

SUPPLY AND DEMAND

P per D Q PRICE 50 S D-S 40 30 20 10 0
Nov. 30, 2010

50 15 53 40 23 41 30 31 29 20 39 17 10 47 5

? ? ? ? ? 42

Econ 11 -- Lecture #7

10

20

30

40

50

QUANTITY

meaning, there is a high demand but a low supply

SUPPLY AND DEMAND

P per D Q PRICE 50 S D-S 40 30 20 30 31 29 ? 10 0 20 39 17 +12 10 47 5 10 20 30 40 50
7

Inadequate demand = Excess supply

50 15 53 -38 40 23 41 ?

Excess demand = Inadequate supply

QUANTITY

SUPPLY AND DEMAND

PRICE 50 P per D Q S D-S 40 30 20 30 31 29 +2 10 0 20 39 17 +12 10 47 5 +42 10 20 30 40 50
8

Inadequate demand = Excess supply

50 15 53 -38 40 23 41 -18

Excess demand = Inadequate supply

QUANTITY

SUPPLY AND DEMAND

PRICE 50 P per D Q S D-S 40 30 20 10 0 D S

50 15 53 -38 40 23 41 -18 30 31 29 +2

20 39 17 +12 10 47 5 +42

10

20

30

40

50

QUANTITY

SUPPLY AND DEMAND

PRICE 50 40 P0 Market equilibrium settles at price P0 and quantity Qo.. 30 20 10 0 D S

10

20

30 Q
0

40

50

10

QUANTITY

AT MARKET EQUILIBRIUM:
Quantity demanded equals quantity supplied. The market clears at the equilibrium price. All the supply for sale is bought by those who have demand. Sellers have no excess or inadequate supplies. Or what is the same, there is no excess demand or excess supply.
Nov. 30, 2010 Econ 11 -- Lecture #7 11

SUPPLY AND DEMAND

PRICE D S

P0 Market equilibrium settles at price P0 and quantity Qo..

0 Q
0

QUANTITY 12

CHANGES OR SHIFTS IN DEMAND

13

SHIFTS IN DEMAND (#1) An INCREASE IN DEMAND: This means that at each level of prices, MORE goods are bought. Graphically, this is a shift of the demand schedule to the right of the old demand schedule.
Nov. 30, 2010 Econ 11 -- Lecture #7 14

AN INCREASE IN DEMAND
PRICE

a move to the right means an increase

New demand schedule Old demand 0 Q1 Q2 QUANTITY

15

SHIFTS IN DEMAND (#2) A DECREASE IN DEMAND: This means that at each level of prices, LESS goods are bought. Graphically, this is a shift of the demand schedule to the left of the old demand schedule.
Nov. 30, 2010 Econ 11 -- Lecture #7 16

A DECREASE IN DEMAND
PRICE

a shift to the left but means a decrease in the demand

New demand schedule Q2 Q1 QUANTITY

Old Demand schedule

17

SHIFTS IN SUPPLY

Nov. 30, 2010

Econ 11 -- Lecture #7

18

AN INCREASE IN SUPPLY
PRICE S S

0 Q
19

QUANTITY

A DECREASE IN SUPPLY
PRICE S S

0 Q Q
20

QUANTITY

ANALYSIS OF CHANGES (SHIFTS) IN MARKET CONDITIONS

DEMAND SUPPLY
Nov. 30, 2010 Econ 11 -- Lecture #7 21

THE MARKET EQUILIBRIUM CAN BE ALTERED BY CHANGES IN SUPPLY AND DEMAND

Question: All other things remaining the same, what happens to the EQUILIBRIUM PRICE AND QUANTITY when

CHANGES IN DEMAND (OR SUPPLY) TAKE PLACE?

AN INCREASE IN DEMAND
PRICE D D S

P1 P0 RESULT: The price GOES UP and quantity INCREASES. 0 Q

0

Q1
23

QUANTITY

A DECREASE IN DEMAND
PRICE D D S

P0 P1 RESULT: The price goes DOWN and quantity FALLS. 0 Q

1

Q0

24

QUANTITY

AN INCREASE IN SUPPLY
PRICE D S S P0 P1

RESULT: The price goes DOWN and quantity INCREASES.

0 Q
0

Q1

25

QUANTITY

AN FALL IN SUPPLY
PRICE D S S P1 P0

RESULT: The price goes UP and quantity FALLS.

0 Q
1

Q0

26

QUANTITY

MARKET EQUILIBRIUM
WHEN BOTH SUPPLY AND DEMAND ARE SHIFTING

CASE #1: THE INCREASE IN DEMAND IS LARGER THAN THE INCREASE IN SUPPLY S
PRICE D D S

P1 P0 RESULT: P increases; Q also increases. 0 Q

0

Q1

28

QUANTITY

CASE #2: THE INCREASE IN SUPPLY IS LARGER THAN THE INCREASE IN DEMAND S
PRICE D D

P0 RESULT: P falls; Q increases. P1

0 Q
0

Q1
29

QUANTITY

SUMMARY:
INCREASES IN DEMAND AND SUPPLY Case #1: Increase in demand is more than the increase in supply
o Q will rise o P will rise

Case #2: Increase in supply is more substantial than the increase in demand
o Q will rise o Nov. P 30, will 2010 fall
Econ 11 -- Lecture #7 30

10

us about the Law of DEMAND SCHEDULE tells Demand

PRICE 50
C P a s per e Q A B C D E

Q 15 23 31 39 47

40 30 20 10 0

50 40 30 20 10

10

20

30

40

50

31

QUANTITY

THE CONCEPT OF ELASTICITY

response p of q quantity y sold to a change in the price of the good

Nov. 30, 2010 Econ 11 -- Lecture #7 32

FORMULA FOR ELASTICITY

Q Percent change changeof of Quantity Q Elasticity = = P Percent change of Price P

11

DEMAND SCHEDULE
PRICE 50
C P a s per e Q A B C D E

P=Change in Price

D 15 23 31 39 47

40 30

P=Base Price Q=Change in Quantity Q=Base Quantity B

50 40 30 20 10

C Lower P D More Q E 0

20 10

10

20

30

40

50

34

QUANTITY

Calculate elasticity between points C and D

C P a s per e Q A B C D E

30 20

31 39

Change in Price = -10 (from 30 to 20). P = 50 (=30+20) to get base price Percent change in Price = (Change in price)/Base price = -10/50 = -1/5 = -0.2. -0 2 Change in Quantity= 8 (from 31 to 39) To substitute for Q = 70 ( = 31+39) to get base quantity. Percent change in Quantity = (Change in Q)/Base Q = 8/70 = 0.114

Elasticity = -0.57 (=0.114/ (-0.2))

35

the hinger the value of absolute value, the higher the response to a unit change

Value of the price elasticity, e, is between infinity and zero!

(Note: Ignore the sign and use the absolute value

ELASTIC e >1 Quantity demanded is very sensitive to a change in price. The schedules of demand and of supply are relatively flat. UNIT ELASTIC e = 1 A unit change in price leads to the same unit change in quantity demanded. INELASTIC e < 1 Quantity demanded is not very sensitive to a change in price. The schedules of demand and of supply are relatively steep.

12

For instance, if elasticity, e, is

e =50 highly elastic, demand schedule is relatively flat. y e = 1.2 elastic, demand schedule is moderately steep. e = 0.8 inelastic, demand schedule is less moderately steep. e = 0.1 highly inelastic, demand schedule is very steep. What is e = infinite Econ amount? Nov. 30, 2010 11 -- Lecture #7 37

End of todays lecture. Good G d day! d ! [Lecture 7]

Nov. 30, 2010 Econ 11 -- Lecture #7 38

13