01. supply and demand
DESCRIPTION
01. supply and demandTRANSCRIPT
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Supply and DemandSupply and Demand
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Supply and DemandSupply and Demand
DemandDemand
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DEMANDDEMAND
Relationship between demand and price the law of demand the income effect the substitution effect
The demand curve assumptions
other things being equal (ceteris paribus) a given time period
the axes individual's and market demand curves
Relationship between demand and price the law of demand the income effect the substitution effect
The demand curve assumptions
other things being equal (ceteris paribus) a given time period
the axes individual's and market demand curves
![Page 4: 01. supply and demand](https://reader034.vdocuments.us/reader034/viewer/2022052522/546374afaf79597a308b5df1/html5/thumbnails/4.jpg)
The demand curve:The demand for potatoes (monthly)
The demand curve:The demand for potatoes (monthly)
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0
20
40
60
80
100
0 100 200 300 400 500 600 700 800
Quantity (tonnes: 000s)
Pri
ce (
pen
ce p
er k
g)
Price(pence per kg)
20
Market demand(tonnes 000s)
700A
Point
A
Market demand for potatoes (monthly)Market demand for potatoes (monthly)
Demand
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0
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0 100 200 300 400 500 600 700 800
Quantity (tonnes: 000s)
Pri
ce (
pen
ce p
er k
g)
Price(pence per kg)
20
40
Market demand(tonnes 000s)
700
500
A
B
Point
A
B
Demand
Market demand for potatoes (monthly)Market demand for potatoes (monthly)
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0
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60
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0 100 200 300 400 500 600 700 800
Quantity (tonnes: 000s)
Pri
ce (
pen
ce p
er k
g)
Price(pence per kg)
20
40
60
Market demand(tonnes 000s)
700
500
350
A
B
C
Point
A
B
C
Demand
Market demand for potatoes (monthly)Market demand for potatoes (monthly)
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0
20
40
60
80
100
0 100 200 300 400 500 600 700 800
Quantity (tonnes: 000s)
Pri
ce (
pen
ce p
er k
g)
Price(pence per kg)
20
40
60
80
Market demand(tonnes 000s)
700
500
350
200
A
B
C
D
Point
A
B
C
D
Demand
Market demand for potatoes (monthly)Market demand for potatoes (monthly)
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0
20
40
60
80
100
0 100 200 300 400 500 600 700 800
Quantity (tonnes: 000s)
Pri
ce (
pen
ce p
er k
g)
Price(pence per kg)
20
40
60
80
100
Market demand(tonnes 000s)
700
500
350
200100
A
B
C
D
E
Point
A
B
C
D
E
Demand
Market demand for potatoes (monthly)Market demand for potatoes (monthly)
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DEMANDDEMAND
Other determinants of demand
tastes
number and price of substitute goods
number and price of complementary goods
income
distribution of income
expectations
Other determinants of demand
tastes
number and price of substitute goods
number and price of complementary goods
income
distribution of income
expectations
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DEMANDDEMAND
Movements along and shifts in the demand curve
change in price
movement along D curve
change in any other determinant of demand
shift in D curve
• increase in demand rightward shift
• decrease in demand leftward shift
Movements along and shifts in the demand curve
change in price
movement along D curve
change in any other determinant of demand
shift in D curve
• increase in demand rightward shift
• decrease in demand leftward shift
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D1
Pric
e
P
O Q0 Q1
Quantity
An increase in demandAn increase in demand
D0
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DEMANDDEMAND
Demand functions
simple demand functions
Qd = a – bP
more complex demand functions
Qd = a – bP + cY + dPs – ePc
estimated demand equations
problems of estimating demand equations
demand functions and the demand curve
Demand functions
simple demand functions
Qd = a – bP
more complex demand functions
Qd = a – bP + cY + dPs – ePc
estimated demand equations
problems of estimating demand equations
demand functions and the demand curve
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0
10
20
30
40
50
0 2 4 6 8 10
D
P
Q (000s)
Demand curve for equation: Qd = 10 000 – 200PDemand curve for equation: Qd = 10 000 – 200P
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0
10
20
30
40
50
0 2 4 6 8 10
P
5
Qd (000s)
9
Demand curve for equation: Qd = 10 000 – 200PDemand curve for equation: Qd = 10 000 – 200P
D
P
Q (000s)
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0
10
20
30
40
50
0 2 4 6 8 10
P
510
Qd (000s)
98
D
P
Q (000s)
Demand curve for equation: Qd = 10 000 – 200PDemand curve for equation: Qd = 10 000 – 200P
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0
10
20
30
40
50
0 2 4 6 8 10
P
51015
Qd (000s)
987
D
P
Q (000s)
Demand curve for equation: Qd = 10 000 – 200PDemand curve for equation: Qd = 10 000 – 200P
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0
10
20
30
40
50
0 2 4 6 8 10
P
5101520
Qd (000s)
9876
D
P
Q (000s)
Demand curve for equation: Qd = 10 000 – 200PDemand curve for equation: Qd = 10 000 – 200P
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Supply and DemandSupply and Demand
SupplySupply
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SUPPLYSUPPLY
Relationship between supply and price short-run supply
long-run supply
The supply curve assumptions
other things remain equal (ceteris paribus)
a given time period
the axes
individual's and market supply curves
Relationship between supply and price short-run supply
long-run supply
The supply curve assumptions
other things remain equal (ceteris paribus)
a given time period
the axes
individual's and market supply curves
![Page 21: 01. supply and demand](https://reader034.vdocuments.us/reader034/viewer/2022052522/546374afaf79597a308b5df1/html5/thumbnails/21.jpg)
The supply curve:The supply of potatoes (monthly)
The supply curve:The supply of potatoes (monthly)
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0
20
40
60
80
100
0 100 200 300 400 500 600 700 800
Pri
ce (
pen
ce p
er k
g)
Quantity (tonnes: 000s)
Supply
a
P
20
Q
100a
Market supply of potatoes (monthly)Market supply of potatoes (monthly)
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0
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40
60
80
100
0 100 200 300 400 500 600 700 800
Pri
ce (
pen
ce p
er k
g)
Quantity (tonnes: 000s)
Supply
a
b
P
20 40
Q
100200
ab
Market supply of potatoes (monthly)Market supply of potatoes (monthly)
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0
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60
80
100
0 100 200 300 400 500 600 700 800
Pri
ce (
pen
ce p
er k
g)
Quantity (tonnes: 000s)
Supply
a
b
c
P
20 40 60
Q
100200350
abc
Market supply of potatoes (monthly)Market supply of potatoes (monthly)
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0
20
40
60
80
100
0 100 200 300 400 500 600 700 800
Pri
ce (
pen
ce p
er k
g)
Quantity (tonnes: 000s)
Supply
a
b
c
d P
20 40 60 80
Q
100200350530
abcd
Market supply of potatoes (monthly)Market supply of potatoes (monthly)
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0
20
40
60
80
100
0 100 200 300 400 500 600 700 800
Pri
ce (
pen
ce p
er k
g)
Quantity (tonnes: 000s)
Supply
a
b
c
d
e
P
20 40 60 80100
Q
100200350530700
abcde
Market supply of potatoes (monthly)Market supply of potatoes (monthly)
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SUPPLYSUPPLY
Relationship between supply and price short-run supply long-run supply
The supply curve assumptions
other things remain equal (ceteris paribus) a given time period
the axes individual's and market supply curves why supply curves generally slope up
Relationship between supply and price short-run supply long-run supply
The supply curve assumptions
other things remain equal (ceteris paribus) a given time period
the axes individual's and market supply curves why supply curves generally slope up
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SUPPLYSUPPLY
Other determinants of supply
costs of production
profitability of alternative products (substitutes in supply)
profitability of goods in joint supply
nature and other random shocks
aims of producers
expectations of producers
Other determinants of supply
costs of production
profitability of alternative products (substitutes in supply)
profitability of goods in joint supply
nature and other random shocks
aims of producers
expectations of producers
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SUPPLYSUPPLY
Movements along and shifts in the supply curve
change in price
movement along S curve
change in any other determinant of supply
shift in S curve
• increase in supply rightward shift
• decrease in supply leftward shift
Movements along and shifts in the supply curve
change in price
movement along S curve
change in any other determinant of supply
shift in S curve
• increase in supply rightward shift
• decrease in supply leftward shift
![Page 30: 01. supply and demand](https://reader034.vdocuments.us/reader034/viewer/2022052522/546374afaf79597a308b5df1/html5/thumbnails/30.jpg)
SUPPLYSUPPLY
Supply functions
simple supply functions
Qs = a + bP
more complex supply functions
Qs = a + bP + cC + dPs – ePj
estimated supply equations
problems of estimating supply equations
Supply functions
simple supply functions
Qs = a + bP
more complex supply functions
Qs = a + bP + cC + dPs – ePj
estimated supply equations
problems of estimating supply equations
![Page 31: 01. supply and demand](https://reader034.vdocuments.us/reader034/viewer/2022052522/546374afaf79597a308b5df1/html5/thumbnails/31.jpg)
P
QO
S0
Increase
Shifts in the supply curveShifts in the supply curve
S1
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P
QO
S2 S0 S1
IncreaseDecrease
Shifts in the supply curveShifts in the supply curve
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Supply and DemandSupply and Demand
Price and output determination
Price and output determination
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PRICE AND OUTPUT DETERMINATIONPRICE AND OUTPUT DETERMINATION
Equilibrium price and output
response to shortages and surpluses
shortage (D > S)
price rises
surplus (S > D)
price falls
significance of ‘equilibrium’
Equilibrium price and output
response to shortages and surpluses
shortage (D > S)
price rises
surplus (S > D)
price falls
significance of ‘equilibrium’
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Equilibrium price and output:The Market Demand and Supply of Potatoes (Monthly)
Equilibrium price and output:The Market Demand and Supply of Potatoes (Monthly)
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0
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0 100 200 300 400 500 600 700 800
The determination of market equilibrium (potatoes: monthly)
The determination of market equilibrium (potatoes: monthly)
Quantity (tonnes: 000s)
E
D
C
Aa
c
d
e
Supply
Demand
Pri
ce (
pen
ce p
er k
g)
Bb
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0
20
40
60
80
100
0 100 200 300 400 500 600 700 800
Quantity (tonnes: 000s)
E
D
C
B
Aa
b
c
d
e
Supply
Demand
Pri
ce (
pen
ce p
er k
g)
SHORTAGE
(300 000)
The determination of market equilibrium (potatoes: monthly)
The determination of market equilibrium (potatoes: monthly)
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0
20
40
60
80
100
0 100 200 300 400 500 600 700 800
Quantity (tonnes: 000s)
E
C
B
Aa
b
c
e
Supply
Demand
Pri
ce (
pen
ce p
er k
g)
D dSURPLUS
(330 000)
The determination of market equilibrium (potatoes: monthly)
The determination of market equilibrium (potatoes: monthly)
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0
20
40
60
80
100
0 100 200 300 400 500 600 700 800
D d
Qe
Quantity (tonnes: 000s)
E
B
Aa
b
e
Supply
Demand
Pri
ce (
pen
ce p
er k
g)The determination of market equilibrium
(potatoes: monthly)The determination of market equilibrium
(potatoes: monthly)
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PRICE AND OUTPUT DETERMINATIONPRICE AND OUTPUT DETERMINATION
Effects of shifts in the demand curve
movement along the supply curve and the new demand curve
Effects of shifts in the demand curve
movement along the supply curve and the new demand curve
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Effect of a shift in the demand curveEffect of a shift in the demand curveP
QO
Pe1
Qe1
S
D1
g
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P
QO
Pe1
Qe1
S
D1
g
Effect of a shift in the demand curveEffect of a shift in the demand curve
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P
QO
Pe1
Qe1
S
D1
D2
g
Effect of a shift in the demand curveEffect of a shift in the demand curve
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P
QO
Pe1
Qe1
S
g h
D1
D2
Pe2
Qe2
i
Effect of a shift in the demand curveEffect of a shift in the demand curve
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PRICE AND OUTPUT DETERMINATIONPRICE AND OUTPUT DETERMINATION
Effects of shifts in the demand curve
movement along the supply curve and the new demand curve
Effects of shifts in the supply curve
movement along demand curve and new supply curve
Effects of shifts in the demand curve
movement along the supply curve and the new demand curve
Effects of shifts in the supply curve
movement along demand curve and new supply curve
![Page 46: 01. supply and demand](https://reader034.vdocuments.us/reader034/viewer/2022052522/546374afaf79597a308b5df1/html5/thumbnails/46.jpg)
Effect of a shift in the supply curveEffect of a shift in the supply curveP
QO
Pe1
Qe1
D
S1
g
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P
QO
Pe1
Qe1
D
S1
g
Effect of a shift in the supply curveEffect of a shift in the supply curve
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P
QO
Pe1
Qe1
D
S1
S2
g
Effect of a shift in the supply curveEffect of a shift in the supply curve
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P
QO
Pe1
Pe3
Qe3Qe1
D
S1
S2
j g
k
Effect of a shift in the supply curveEffect of a shift in the supply curve
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PRICE AND OUTPUT DETERMINATIONPRICE AND OUTPUT DETERMINATION
Effects of shifts in the demand curve
movement along the supply curve and the new demand curve
Effects of shifts in the supply curve
movement along demand curve and new supply curve
Identifying the position of demand and supply curves
Effects of shifts in the demand curve
movement along the supply curve and the new demand curve
Effects of shifts in the supply curve
movement along demand curve and new supply curve
Identifying the position of demand and supply curves
![Page 51: 01. supply and demand](https://reader034.vdocuments.us/reader034/viewer/2022052522/546374afaf79597a308b5df1/html5/thumbnails/51.jpg)
Problems in identifying the position and shape of the demand curve: shift in supply curve
Problems in identifying the position and shape of the demand curve: shift in supply curve
P
O Q
S1
1000
20p a
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P
O Q
S1
S2
800 1000
20p
30p b
a
Problems in identifying the position and shape of the demand curve: shift in supply curve
Problems in identifying the position and shape of the demand curve: shift in supply curve
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P
O Q
D
S1
S2
800 1000
20p
30p b
a
Problems in identifying the position and shape of the demand curve: shift in supply curve
Problems in identifying the position and shape of the demand curve: shift in supply curve
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Problems in identifying the position and shape of the demand curve: shift in supply and demand curves
Problems in identifying the position and shape of the demand curve: shift in supply and demand curves
P
O Q
S1
20p a
1000
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P
O Q
S1
S2
20p
30p b
a
800 1000
Problems in identifying the position and shape of the demand curve: shift in supply and demand curves
Problems in identifying the position and shape of the demand curve: shift in supply and demand curves
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P
O Q
S1
S2
800 1000
20p
30p b
a
D1
D2
Problems in identifying the position and shape of the demand curve: shift in supply and demand curves
Problems in identifying the position and shape of the demand curve: shift in supply and demand curves
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Supply and DemandSupply and Demand
ElasticityElasticity
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ELASTICITYELASTICITY
Defining elasticity
the responsiveness of demand and supply
Price elasticity of demand
the responsiveness of demand to a change in price
Defining elasticity
the responsiveness of demand and supply
Price elasticity of demand
the responsiveness of demand to a change in price
![Page 59: 01. supply and demand](https://reader034.vdocuments.us/reader034/viewer/2022052522/546374afaf79597a308b5df1/html5/thumbnails/59.jpg)
Quantity
Pri
ce
O Q1
P1
a
S1
D
Market supply and demandMarket supply and demand
![Page 60: 01. supply and demand](https://reader034.vdocuments.us/reader034/viewer/2022052522/546374afaf79597a308b5df1/html5/thumbnails/60.jpg)
Quantity
Pri
ce
O Q2 Q1
P1
P2
b
S2
S1
D
a
Market supply and demandMarket supply and demand
![Page 61: 01. supply and demand](https://reader034.vdocuments.us/reader034/viewer/2022052522/546374afaf79597a308b5df1/html5/thumbnails/61.jpg)
Quantity
Pri
ce
O Q2 Q1
P1
P2
S2
S1
D
D'
a
b
Market supply and demandMarket supply and demand
![Page 62: 01. supply and demand](https://reader034.vdocuments.us/reader034/viewer/2022052522/546374afaf79597a308b5df1/html5/thumbnails/62.jpg)
Quantity
Pri
ce
O Q3 Q2 Q1
P1
P2
P3
c
S2
S1
D
D'
a
b
Market supply and demandMarket supply and demand
![Page 63: 01. supply and demand](https://reader034.vdocuments.us/reader034/viewer/2022052522/546374afaf79597a308b5df1/html5/thumbnails/63.jpg)
ELASTICITYELASTICITY
Price elasticity of demand
measurement
proportionate (or %) Qd / proportionate (or %) P
use of proportionate or percentage changes
the sign (positive or negative)
the value (greater or less than one)
Price elasticity of demand
measurement
proportionate (or %) Qd / proportionate (or %) P
use of proportionate or percentage changes
the sign (positive or negative)
the value (greater or less than one)
![Page 64: 01. supply and demand](https://reader034.vdocuments.us/reader034/viewer/2022052522/546374afaf79597a308b5df1/html5/thumbnails/64.jpg)
ELASTICITYELASTICITY
Determinants of price elasticity of demand number and closeness of substitute goods
the proportion of income spent on the good
time
Price elasticity of demand and consumer expenditure (P x Q)
Determinants of price elasticity of demand number and closeness of substitute goods
the proportion of income spent on the good
time
Price elasticity of demand and consumer expenditure (P x Q)
![Page 65: 01. supply and demand](https://reader034.vdocuments.us/reader034/viewer/2022052522/546374afaf79597a308b5df1/html5/thumbnails/65.jpg)
Consumers’ total expenditure =
firms’ total revenue=
£2 x 3m = £6m
Consumers’ total expenditure =
firms’ total revenue=
£2 x 3m = £6m
P(£)
Q (millions of units per period of time)
D
Total expenditureTotal expenditure
0
1
2
3
4
0 1 2 3 4 5
![Page 66: 01. supply and demand](https://reader034.vdocuments.us/reader034/viewer/2022052522/546374afaf79597a308b5df1/html5/thumbnails/66.jpg)
ELASTICITYELASTICITY
Price elasticity of demand and consumer expenditure (P x Q)
effects of a price change on expenditure: elastic demand
Price elasticity of demand and consumer expenditure (P x Q)
effects of a price change on expenditure: elastic demand
![Page 67: 01. supply and demand](https://reader034.vdocuments.us/reader034/viewer/2022052522/546374afaf79597a308b5df1/html5/thumbnails/67.jpg)
P(£)
Q (millions of units per period of time)
0
aD
Elastic demand between two pointsElastic demand between two points
Expenditure fallsas price rises
4
20
5
10
b
![Page 68: 01. supply and demand](https://reader034.vdocuments.us/reader034/viewer/2022052522/546374afaf79597a308b5df1/html5/thumbnails/68.jpg)
ELASTICITYELASTICITY
Price elasticity of demand and consumer expenditure (P x Q)
effects of a price change on expenditure: elastic demand
effects of a price change on expenditure: inelastic demand
Price elasticity of demand and consumer expenditure (P x Q)
effects of a price change on expenditure: elastic demand
effects of a price change on expenditure: inelastic demand
![Page 69: 01. supply and demand](https://reader034.vdocuments.us/reader034/viewer/2022052522/546374afaf79597a308b5df1/html5/thumbnails/69.jpg)
a4
20
P(£)
Q (millions of units per period of time)
0
D
Expenditure risesas price rises
Inelastic demand between two pointsInelastic demand between two points
8
15
c
![Page 70: 01. supply and demand](https://reader034.vdocuments.us/reader034/viewer/2022052522/546374afaf79597a308b5df1/html5/thumbnails/70.jpg)
ELASTICITYELASTICITY
Price elasticity of demand and consumer expenditure (P x Q)
effects of a price change on expenditure: elastic demand
effects of a price change on expenditure: inelastic demand
special cases
Price elasticity of demand and consumer expenditure (P x Q)
effects of a price change on expenditure: elastic demand
effects of a price change on expenditure: inelastic demand
special cases
![Page 71: 01. supply and demand](https://reader034.vdocuments.us/reader034/viewer/2022052522/546374afaf79597a308b5df1/html5/thumbnails/71.jpg)
P2
P
QO Q1
P1
D
b
a
Totally inelastic demand (PD = 0)Totally inelastic demand (PD = 0)
![Page 72: 01. supply and demand](https://reader034.vdocuments.us/reader034/viewer/2022052522/546374afaf79597a308b5df1/html5/thumbnails/72.jpg)
Q2
P
QO Q1
P1 Da b
Infinitely elastic demand (PD = )Infinitely elastic demand (PD = )
![Page 73: 01. supply and demand](https://reader034.vdocuments.us/reader034/viewer/2022052522/546374afaf79597a308b5df1/html5/thumbnails/73.jpg)
P
QO 40
20
D
100
8
a
Unit elastic demand (PD = –1)Unit elastic demand (PD = –1)
b
![Page 74: 01. supply and demand](https://reader034.vdocuments.us/reader034/viewer/2022052522/546374afaf79597a308b5df1/html5/thumbnails/74.jpg)
ELASTICITYELASTICITY
Price elasticity of demand and consumer expenditure (P x Q)
effects of a price change on expenditure: elastic demand
effects of a price change on expenditure: inelastic demand
special cases
applications to price decisions
Price elasticity of demand and consumer expenditure (P x Q)
effects of a price change on expenditure: elastic demand
effects of a price change on expenditure: inelastic demand
special cases
applications to price decisions
![Page 75: 01. supply and demand](https://reader034.vdocuments.us/reader034/viewer/2022052522/546374afaf79597a308b5df1/html5/thumbnails/75.jpg)
P(£)
Q (millions of units per period of time)
0
b
aD
5
4
10 20
Expenditure fallsas price rises
Elastic demand between two pointsElastic demand between two points
![Page 76: 01. supply and demand](https://reader034.vdocuments.us/reader034/viewer/2022052522/546374afaf79597a308b5df1/html5/thumbnails/76.jpg)
P(£)
Q (millions of units per period of time)
0
c
a
D
8
4
15 20
Expenditure risesas price rises
Inelastic demand between two pointsInelastic demand between two points
![Page 77: 01. supply and demand](https://reader034.vdocuments.us/reader034/viewer/2022052522/546374afaf79597a308b5df1/html5/thumbnails/77.jpg)
ELASTICITYELASTICITY
Price elasticity of demand and consumer expenditure (P x Q)
effects of a price change on expenditure: elastic demand
effects of a price change on expenditure: inelastic demand
special cases
applications to price decisions
different elasticities along a demand curve
Price elasticity of demand and consumer expenditure (P x Q)
effects of a price change on expenditure: elastic demand
effects of a price change on expenditure: inelastic demand
special cases
applications to price decisions
different elasticities along a demand curve
![Page 78: 01. supply and demand](https://reader034.vdocuments.us/reader034/viewer/2022052522/546374afaf79597a308b5df1/html5/thumbnails/78.jpg)
Different elasticities along different portions of a demand curveDifferent elasticities along different portions of a demand curve
P
QO
P1
Q1
a
D
![Page 79: 01. supply and demand](https://reader034.vdocuments.us/reader034/viewer/2022052522/546374afaf79597a308b5df1/html5/thumbnails/79.jpg)
P
QO
P1
P2
Q1 Q2
a
b
D
Elasticdemand
Different elasticities along different portions of a demand curveDifferent elasticities along different portions of a demand curve
![Page 80: 01. supply and demand](https://reader034.vdocuments.us/reader034/viewer/2022052522/546374afaf79597a308b5df1/html5/thumbnails/80.jpg)
P
QO
P1
P2
P3
Q1 Q2Q3
a
b
c
D
Inelasticdemand
Different elasticities along different portions of a demand curveDifferent elasticities along different portions of a demand curve
![Page 81: 01. supply and demand](https://reader034.vdocuments.us/reader034/viewer/2022052522/546374afaf79597a308b5df1/html5/thumbnails/81.jpg)
ELASTICITYELASTICITY
Measurement of elasticity: arc elasticity
the formula for price elasticity of demand
Q/Q ÷ P/P
using the average or 'mid-point' method
Measurement of elasticity: arc elasticity
the formula for price elasticity of demand
Q/Q ÷ P/P
using the average or 'mid-point' method
![Page 82: 01. supply and demand](https://reader034.vdocuments.us/reader034/viewer/2022052522/546374afaf79597a308b5df1/html5/thumbnails/82.jpg)
0
2
4
6
8
10
0 10 20 30 40 50
P (£)
Q (000s)
Demand
Measuring elasticity using the arc methodMeasuring elasticity using the arc method
m
n
![Page 83: 01. supply and demand](https://reader034.vdocuments.us/reader034/viewer/2022052522/546374afaf79597a308b5df1/html5/thumbnails/83.jpg)
0
2
4
6
8
10
0 10 20 30 40 50
P (£)
Q (000s)
Q P
mid Q mid PPd =
Demand
m
n
Q = 10
P = –2
Mid P
7
Mid Q15
Measuring elasticity using the arc methodMeasuring elasticity using the arc method
![Page 84: 01. supply and demand](https://reader034.vdocuments.us/reader034/viewer/2022052522/546374afaf79597a308b5df1/html5/thumbnails/84.jpg)
0
2
4
6
8
10
0 10 20 30 40 50
P (£)
Q (000s)
Q P
mid Q mid PPd =
10 2 15 7
=
Demand
m
n
Q = 10
P = –2
Mid P
7
Mid Q15
Measuring elasticity using the arc methodMeasuring elasticity using the arc method
![Page 85: 01. supply and demand](https://reader034.vdocuments.us/reader034/viewer/2022052522/546374afaf79597a308b5df1/html5/thumbnails/85.jpg)
0
2
4
6
8
10
0 10 20 30 40 50
P (£)
Q (000s)
Q P
mid Q mid PPd =
10 2 15 7
=
= 10/15 x 7/2
Demand
m
n
Q = 10
P = –2
Mid P
7
Mid Q15
Measuring elasticity using the arc methodMeasuring elasticity using the arc method
![Page 86: 01. supply and demand](https://reader034.vdocuments.us/reader034/viewer/2022052522/546374afaf79597a308b5df1/html5/thumbnails/86.jpg)
0
2
4
6
8
10
0 10 20 30 40 50
P (£)
Q (000s)
Q P
mid Q mid PPd =
10 2 15 7
=
= 10/15 x 7/2
= 70/30
Demand
m
n
Q = 10
P = –2
Mid P
7
Mid Q15
Measuring elasticity using the arc methodMeasuring elasticity using the arc method
![Page 87: 01. supply and demand](https://reader034.vdocuments.us/reader034/viewer/2022052522/546374afaf79597a308b5df1/html5/thumbnails/87.jpg)
0
2
4
6
8
10
0 10 20 30 40 50
P (£)
Q (000s)
Q P
mid Q mid PPd =
10 2 15 7
=
= 10/15 x 7/2
= 70/30
= 7/3 = 2.33
Demand
m
n
Q = 10
P = –2
Mid P
7
Mid Q15
Measuring elasticity using the arc methodMeasuring elasticity using the arc method
![Page 88: 01. supply and demand](https://reader034.vdocuments.us/reader034/viewer/2022052522/546374afaf79597a308b5df1/html5/thumbnails/88.jpg)
ELASTICITYELASTICITY
Measurement of elasticity: point elasticity
the formula for price elasticity of demand
dQ/dP x P/Q
the elasticity of a straight-line demand ‘curve’ (constant dQ/dP)
the elasticity of a curved demand curve
dQ/dP is the tangent to the curve
Measurement of elasticity: point elasticity
the formula for price elasticity of demand
dQ/dP x P/Q
the elasticity of a straight-line demand ‘curve’ (constant dQ/dP)
the elasticity of a curved demand curve
dQ/dP is the tangent to the curve
![Page 89: 01. supply and demand](https://reader034.vdocuments.us/reader034/viewer/2022052522/546374afaf79597a308b5df1/html5/thumbnails/89.jpg)
Measuring elasticity at a pointMeasuring elasticity at a point
P
Q
0
D
r
Pd = (1 / slope) x P/Q
![Page 90: 01. supply and demand](https://reader034.vdocuments.us/reader034/viewer/2022052522/546374afaf79597a308b5df1/html5/thumbnails/90.jpg)
P
Q
30
0 40
D
r
50
100
Pd = (1 / slope) x P/Q
Measuring elasticity at a pointMeasuring elasticity at a point
![Page 91: 01. supply and demand](https://reader034.vdocuments.us/reader034/viewer/2022052522/546374afaf79597a308b5df1/html5/thumbnails/91.jpg)
P
Q
50
30
0 40 100
D
r
Pd = (1 / slope) x P/Q
= 100/50 x 30/40
Measuring elasticity at a pointMeasuring elasticity at a point
![Page 92: 01. supply and demand](https://reader034.vdocuments.us/reader034/viewer/2022052522/546374afaf79597a308b5df1/html5/thumbnails/92.jpg)
P
Q
50
30
0 40 100
D
r
Pd = (1 / slope) x P/Q
= 100/50 x 30/40
= 60/40
Measuring elasticity at a pointMeasuring elasticity at a point
![Page 93: 01. supply and demand](https://reader034.vdocuments.us/reader034/viewer/2022052522/546374afaf79597a308b5df1/html5/thumbnails/93.jpg)
P
Q
50
30
0 40 100
D
r
Pd = (1 / slope) x P/Q
= 100/50 x 30/40
= 60/40
= 1.5
Measuring elasticity at a pointMeasuring elasticity at a point
![Page 94: 01. supply and demand](https://reader034.vdocuments.us/reader034/viewer/2022052522/546374afaf79597a308b5df1/html5/thumbnails/94.jpg)
ELASTICITYELASTICITY
Measurement of elasticity: point elasticity the formula for price elasticity of demand
dQ/dP x P/Q
the elasticity of a straight-line demand ‘curve’ (constant dQ/dP)
the elasticity of a curved demand curve
dQ/dP is the tangent to the curve
different elasticities along a straight-line demand curve
Measurement of elasticity: point elasticity the formula for price elasticity of demand
dQ/dP x P/Q
the elasticity of a straight-line demand ‘curve’ (constant dQ/dP)
the elasticity of a curved demand curve
dQ/dP is the tangent to the curve
different elasticities along a straight-line demand curve
![Page 95: 01. supply and demand](https://reader034.vdocuments.us/reader034/viewer/2022052522/546374afaf79597a308b5df1/html5/thumbnails/95.jpg)
0
2
4
6
8
10
0 10 20 30 40 50
Different elasticities along a straight-line demand curveDifferent elasticities along a straight-line demand curve
P
Q
Demand
n
m
l
k
Pd = (1 / slope) x P/Q
![Page 96: 01. supply and demand](https://reader034.vdocuments.us/reader034/viewer/2022052522/546374afaf79597a308b5df1/html5/thumbnails/96.jpg)
0
2
4
6
8
10
0 10 20 30 40 50
P
Q
Demand
n
m
l
k
Pd = (1 / slope) x P/Q
(1 / slope) is constant
= 50/10 = 5
Different elasticities along a straight-line demand curveDifferent elasticities along a straight-line demand curve
![Page 97: 01. supply and demand](https://reader034.vdocuments.us/reader034/viewer/2022052522/546374afaf79597a308b5df1/html5/thumbnails/97.jpg)
0
2
4
6
8
10
0 10 20 30 40 50
P
Q
Demand
n
m
l
k
Pd = (1 / slope) x P/Q
(1 / slope) is constant
= 50/10 = 5But P/Q varies:
at n, P/Q = 8/10
Different elasticities along a straight-line demand curveDifferent elasticities along a straight-line demand curve
![Page 98: 01. supply and demand](https://reader034.vdocuments.us/reader034/viewer/2022052522/546374afaf79597a308b5df1/html5/thumbnails/98.jpg)
0
2
4
6
8
10
0 10 20 30 40 50
P
Q
Demand
n
m
l
k
Pd = (1 / slope) x P/Q
(1 / slope) is constant
= 50/10 = 5But P/Q varies:
at n, P/Q = 8/10at m, P/Q = 6/20at l, P/Q = 4/30
l
Different elasticities along a straight-line demand curveDifferent elasticities along a straight-line demand curve
![Page 99: 01. supply and demand](https://reader034.vdocuments.us/reader034/viewer/2022052522/546374afaf79597a308b5df1/html5/thumbnails/99.jpg)
ELASTICITYELASTICITY
Price elasticity of supply measurement
determinants
applications
Price elasticity of supply measurement
determinants
applications
![Page 100: 01. supply and demand](https://reader034.vdocuments.us/reader034/viewer/2022052522/546374afaf79597a308b5df1/html5/thumbnails/100.jpg)
Supply in different time periodsSupply in different time periods
D1
P1
Q1
P
Q O
a
![Page 101: 01. supply and demand](https://reader034.vdocuments.us/reader034/viewer/2022052522/546374afaf79597a308b5df1/html5/thumbnails/101.jpg)
D1
D2
P1
Q1
P
Q O
a
Supply in different time periodsSupply in different time periods
![Page 102: 01. supply and demand](https://reader034.vdocuments.us/reader034/viewer/2022052522/546374afaf79597a308b5df1/html5/thumbnails/102.jpg)
D1
D2
Si
P1
P2
Q1
P
Q O
a
b
Supply in different time periodsSupply in different time periods
![Page 103: 01. supply and demand](https://reader034.vdocuments.us/reader034/viewer/2022052522/546374afaf79597a308b5df1/html5/thumbnails/103.jpg)
D1
D2
Si SS
P1
P3
P2
Q1 Q3
P
Q O
a
b
c
Supply in different time periodsSupply in different time periods
![Page 104: 01. supply and demand](https://reader034.vdocuments.us/reader034/viewer/2022052522/546374afaf79597a308b5df1/html5/thumbnails/104.jpg)
D1
D2
Si SS
SL
P1
P3
P2
Q1 Q3
P
Q O
a
b
c
P4
Q4
d
Supply in different time periodsSupply in different time periods
![Page 105: 01. supply and demand](https://reader034.vdocuments.us/reader034/viewer/2022052522/546374afaf79597a308b5df1/html5/thumbnails/105.jpg)
ELASTICITYELASTICITY
Income elasticity of demand
measurement
determinants
applications
Cross-price elasticity of demand
measurement
determinants
applications
Income elasticity of demand
measurement
determinants
applications
Cross-price elasticity of demand
measurement
determinants
applications
![Page 106: 01. supply and demand](https://reader034.vdocuments.us/reader034/viewer/2022052522/546374afaf79597a308b5df1/html5/thumbnails/106.jpg)
Supply and DemandSupply and Demand
The Time DimensionThe Time
Dimension
![Page 107: 01. supply and demand](https://reader034.vdocuments.us/reader034/viewer/2022052522/546374afaf79597a308b5df1/html5/thumbnails/107.jpg)
THE TIME DIMENSIONTHE TIME DIMENSION
Short-run and long-run price adjustment
short- and long-run demand and supply curves
short- and long-run adjustment to a change in demand or supply
Short-run and long-run price adjustment
short- and long-run demand and supply curves
short- and long-run adjustment to a change in demand or supply
![Page 108: 01. supply and demand](https://reader034.vdocuments.us/reader034/viewer/2022052522/546374afaf79597a308b5df1/html5/thumbnails/108.jpg)
D1
P1
Q1
P
Q O
Response of supply to an increase in demandResponse of supply to an increase in demand
a
![Page 109: 01. supply and demand](https://reader034.vdocuments.us/reader034/viewer/2022052522/546374afaf79597a308b5df1/html5/thumbnails/109.jpg)
D1
D2
P1
Q1
P
Q O
a
Response of supply to an increase in demandResponse of supply to an increase in demand
![Page 110: 01. supply and demand](https://reader034.vdocuments.us/reader034/viewer/2022052522/546374afaf79597a308b5df1/html5/thumbnails/110.jpg)
D1
D2
S short-run
P1
P2
Q1 Q2
P
Q O
a
b
Response of supply to an increase in demandResponse of supply to an increase in demand
![Page 111: 01. supply and demand](https://reader034.vdocuments.us/reader034/viewer/2022052522/546374afaf79597a308b5df1/html5/thumbnails/111.jpg)
D1
D2
S long-run
P1
P3
P2
Q1 Q2 Q3
P
Q O
b
c
S short-run
a
Response of supply to an increase in demandResponse of supply to an increase in demand
![Page 112: 01. supply and demand](https://reader034.vdocuments.us/reader034/viewer/2022052522/546374afaf79597a308b5df1/html5/thumbnails/112.jpg)
Response of demand to an increase in supplyResponse of demand to an increase in supply
S1
P1
Q1
P
Q O
a
![Page 113: 01. supply and demand](https://reader034.vdocuments.us/reader034/viewer/2022052522/546374afaf79597a308b5df1/html5/thumbnails/113.jpg)
S1
P1
Q1
P
Q O
a
S2
Response of demand to an increase in supplyResponse of demand to an increase in supply
![Page 114: 01. supply and demand](https://reader034.vdocuments.us/reader034/viewer/2022052522/546374afaf79597a308b5df1/html5/thumbnails/114.jpg)
S1
S2
D short-run
P1
P2
Q1 Q2
P
Q O
a
b
Response of demand to an increase in supplyResponse of demand to an increase in supply
![Page 115: 01. supply and demand](https://reader034.vdocuments.us/reader034/viewer/2022052522/546374afaf79597a308b5df1/html5/thumbnails/115.jpg)
S1
S2
D short-run
D long-run
P1
P3
P2
Q1 Q2 Q3
P
Q O
a
b
c
Response of demand to an increase in supplyResponse of demand to an increase in supply
![Page 116: 01. supply and demand](https://reader034.vdocuments.us/reader034/viewer/2022052522/546374afaf79597a308b5df1/html5/thumbnails/116.jpg)
THE TIME DIMENSIONTHE TIME DIMENSION
Short-run and long-run price adjustment short- and long-run demand and supply curves short- and long-run adjustment to a change in
demand or supply
Speculation
Short-run and long-run price adjustment short- and long-run demand and supply curves short- and long-run adjustment to a change in
demand or supply
Speculation
![Page 117: 01. supply and demand](https://reader034.vdocuments.us/reader034/viewer/2022052522/546374afaf79597a308b5df1/html5/thumbnails/117.jpg)
THE TIME DIMENSIONTHE TIME DIMENSION
Short-run and long-run price adjustment short- and long-run demand and supply curves short- and long-run adjustment to a change in
demand or supply
Speculation stabilising speculation
Short-run and long-run price adjustment short- and long-run demand and supply curves short- and long-run adjustment to a change in
demand or supply
Speculation stabilising speculation
![Page 118: 01. supply and demand](https://reader034.vdocuments.us/reader034/viewer/2022052522/546374afaf79597a308b5df1/html5/thumbnails/118.jpg)
Stabilising speculation: initial price fallStabilising speculation: initial price fall
P1
P
Q O
S1
D1
a
![Page 119: 01. supply and demand](https://reader034.vdocuments.us/reader034/viewer/2022052522/546374afaf79597a308b5df1/html5/thumbnails/119.jpg)
P1
P2
P
Q O
D2
a
b
S1
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THE TIME DIMENSIONTHE TIME DIMENSION
Short-run and long-run price adjustment short- and long-run demand and supply curves short- and long-run adjustment to a change in
demand or supply
Speculation stabilising speculation destabilising speculation
Short-run and long-run price adjustment short- and long-run demand and supply curves short- and long-run adjustment to a change in
demand or supply
Speculation stabilising speculation destabilising speculation
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THE TIME DIMENSIONTHE TIME DIMENSION
Short-run and long-run price adjustment short- and long-run demand and supply curves short- and long-run adjustment to a change in
demand or supply
Speculation stabilising speculation destabilising speculation
Uncertainty and risk
Short-run and long-run price adjustment short- and long-run demand and supply curves short- and long-run adjustment to a change in
demand or supply
Speculation stabilising speculation destabilising speculation
Uncertainty and risk
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THE TIME DIMENSIONTHE TIME DIMENSION
Short-run and long-run price adjustment short- and long-run demand and supply curves short- and long-run adjustment to a change in
demand or supply
Speculation stabilising speculation destabilising speculation
Uncertainty and risk defining risk and uncertainty
Short-run and long-run price adjustment short- and long-run demand and supply curves short- and long-run adjustment to a change in
demand or supply
Speculation stabilising speculation destabilising speculation
Uncertainty and risk defining risk and uncertainty
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THE TIME DIMENSIONTHE TIME DIMENSION
Short-run and long-run price adjustment short- and long-run demand and supply curves short- and long-run adjustment to a change in
demand or supply
Speculation stabilising speculation destabilising speculation
Uncertainty and risk defining risk and uncertainty reducing risks by holding stocks
Short-run and long-run price adjustment short- and long-run demand and supply curves short- and long-run adjustment to a change in
demand or supply
Speculation stabilising speculation destabilising speculation
Uncertainty and risk defining risk and uncertainty reducing risks by holding stocks
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THE TIME DIMENSIONTHE TIME DIMENSION
Short-run and long-run price adjustment short- and long-run demand and supply curves short- and long-run adjustment to a change in
demand or supply
Speculation stabilising speculation destabilising speculation
Uncertainty and risk defining risk and uncertainty reducing risks by holding stocks futures markets
Short-run and long-run price adjustment short- and long-run demand and supply curves short- and long-run adjustment to a change in
demand or supply
Speculation stabilising speculation destabilising speculation
Uncertainty and risk defining risk and uncertainty reducing risks by holding stocks futures markets