Dolan, Microeconomics 4e, Ch. 2 Survey of Economics Edwin G. Dolan and Kevin C. Klein Best Value Textbooks 4 th edition Chapter 2 Supply and Demand The Basics

Dolan and Klein, Survey of Economics 4e, Ch. 2 The Demand Curve  A demand curve shows the quantity of a good demanded at various prices.  Examples:  At a price of $2.00 per pound, buyers are willing and able to purchase 2 billion pounds of chicken per year (point A).  At a price of $1.00 per pound, they will purchase 3 billion pounds (point B).

Dolan and Klein, Survey of Economics 4e, Ch. 2 Change in the Quantity Demanded  All conditions other than price that affect demand are considered to be constant under the “other things being equal” clause of the law of demand.  As long as these other conditions do not change, the only two variables at work are quantity demanded (on the horizontal axis) and price (on the vertical axis).  The effect of a change in price on quantity demanded is shown by a movement along the demand curve.

Dolan and Klein, Survey of Economics 4e, Ch. 2 Change in Demand  Conditions other than price of chicken that affect demand for chicken include prices of other goods, consumer incomes, and consumer tastes.  Example:  Suppose the price of chicken remains constant at $2 per pound while the price of beef (a substitute) increases.  The demand for chicken will increase, shown by a shift in the demand curve from D 1 to D 2.

Dolan and Klein, Survey of Economics 4e, Ch. 2 Change in Consumer Income  Suppose an increase in consumer income causes the demand curve for chicken to shift from D 1 to D 2 as shown. This indicates that chicken is A.An inferior good B.A normal good C.A substitute D.A complement

Dolan and Klein, Survey of Economics 4e, Ch. 2 The Supply Curve  A supply curve shows the quantity of a good producers will supply at any given price, other things being equal.  Examples:  If the price of chicken is $2, producers will supply $2 billion pounds per year.  If the price is $3, they will supply $3 billion pounds per year.

Dolan and Klein, Survey of Economics 4e, Ch. 2 The Supply Curve and the PPF  The production possibility frontier provides one explanation of why the supply curve has a positive slope.  As the quantity of chicken produced increases, the opportunity cost of producing it increases, as shown by the increasing slope of the PPF.

Dolan and Klein, Survey of Economics 4e, Ch. 2 A Change in Supply  Conditions other than price of chicken that affect the supply of chicken include technology, input prices, prices of other goods, and expectations.  Example:  Suppose the price of chicken feed increases. The supply curve will shift upward S 1 to S 3.  Suppose new organic farming methods lower the cost of producing chicken. The supply curve will shift downward S 1 to S 2.

Dolan and Klein, Survey of Economics 4e, Ch. 2 Equilibrium  When the plans of buyers and sellers mesh when tested in the market place, the market is in equilibrium.  If the price is too high, there will be a surplus.  If the price is too low, there will be a shortage.

Dolan and Klein, Survey of Economics 4e, Ch. 2 A Change in Equilibrium  Which diagram best represents the effect on the market for beef of an increase in the cost of corn used as feed for beef cattle?  An increase in the price of an input will shift the supply curve as shown in the right-hand diagram.

Dolan and Klein, Survey of Economics 4e, Ch. 2 Price Support for Milk  With demand curve in position D 1, the market would be in equilibrium at a price of $13.  With a price support (minimum price) of $13 and demand curve D 2, there would be a surplus of milk.

Dolan and Klein, Survey of Economics 4e, Ch. 2 Effects of Rent Control  Rent control (maximum rent) on housing will cause a shortage of rental housing.  The shortage will be greater in the long run when there is time to adjust the quantity of housing supplied.

Dolan and Klein, Survey of Economics 4e, Ch. 2 Appendix to Chapter 2 – Elasticity of Demand  The price elasticity of demand is the ratio of the percentage change in the quantity of a good demanded to a given percentage change in its price.  The midpoint formula for calculating price elasticity of demand is as follows:

Dolan and Klein, Survey of Economics 4e, Ch. 2 Elastic and Inelastic Demand  The relationship between price and revenue along a given demand curve depends on whether demand is elastic, inelastic, or unit elastic.

Dolan and Klein, Survey of Economics 4e, Ch. 2 Changes in Elasticity  Elasticity of demand changes along a straight-line demand curve as shown in part (a) of the diagram.  A constant-elasticity demand curve has the shape shown in part (b) of the diagram.

Dolan and Klein, Survey of Economics 4e, Ch. 2 Incidence of a Gasoline Tax  Tax incidence means who bears the economic burden of a tax.  In this example, a tax of $.50 per gallon shifts the supply curve to S2. To induce sellers to supply the same quantity as before, the price would have to rise to $1.50. However, as the price rises, buyers reduce the quantity demanded, moving up and to the left along the demand curve.  In the new equilibrium at E2, the price rises only to $1.40. After the tax is paid, sellers receive only $.90 per gallon.  Thus, buyers bear $.40 of the tax on each gallon and sellers the remaining $.10. Buyers bear the larger share of the tax because demand, in this case, is less elastic than supply.

Dolan and Klein, Survey of Economics 4e, Ch. 2 Incidence of a Tax on Rents  This figure shows the incidence of a tax imposed in a market like that for apartments, in which supply is less elastic than demand.  Before tax, the equilibrium rent is $500 per month. A $250-per-month tax on apartment rents shifts the supply curve to S2. The new equilibrium is at E2.  Landlords end up absorbing all but $50 of the tax. If they tried to pass more of the tax on to renters, more renters would switch to owner- occupied housing, and the vacancy rate on rental apartments would rise.

Dolan and Klein, Survey of Economics 4e, Ch. 2 Tax Incidence and Revenue  A tax imposed on a good that has an inelastic demand will generate more tax revenue than a tax on a good with elastic demand, assuming similar supply conditions.  The diagrams below compare the effects of a $1.00 tax on the markets for milk (inelastic demand) and pork (elastic demand).