1. 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

2. 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).

3. 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.

4. 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.

5. 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

6. 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.

7. 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.

8. 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.

9. 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.

10. 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.

11. 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.

12. 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.

13. 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:

14. 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.

15. 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.

16. 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.

17. 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.

18. 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).