1. Chapter 2 Suppy and Demand Analysis
MicroEconomics

2. 2.1 Demand, Supply, and Market Equilibrium
3 building blocks of supply and demand analysis
Demand curves
Supply curves
Concept of market equilibrium
Effect on market equilibrium when supply and demand shift
Learn about the price elasticity of demand and how it varies along different types of demand curves
Relationship between price elasticity of demand and total revenue
Determinants of price elasticity of demand
Distinction between market-level and brand-level price elasticities of demand
Elasticities
Income elasticity of demand
Cross-price elasticity of demand
Price elasticity of supply
How they differ long run and short run

3. Demand Curves
Market demand curve: tells us the quantity that buyers are willing to purchase at different prices
Derived demand: demand for a good that is derived from the production and sale of other goods. Ex. Corn to corn syrup to soda producers
Direct demand: demand for the good itself
-The demand curve also tells us what the “market will bear” for given quantities and or supply of output.
-Demand curve decreases on the Quantity (x-axis), Price (y-axis) graph. As price increase, quantity decreases.
Law of Demand: The inverse relationship between the price of a good and the quantity demanded, when all the other factors that influence demand are held.

4. Supply Curves
Market supply curves: a curve that shows us the total quantity of goods that their suppliers are willing to sell at different prices
Law of supply: The positive relationship between price and quantity supplied, when all other factors that influence supply are held fixed.
-The supply curve slopes upward. Suppliers are willing to offer more quantity at higher prices.
Factors of production: resources such as labor and raw materials that are used to produce a good. This will affect the quantity of the good that sellers are willing to supply.

5. Market Equilibrium
The point at which the supply and demand curves intersect.
A point at which there is no tendency for the market price to change as long as outside variables (rainfall affect corn) remain unchanged.
Excess supply: quantity supplied at a given price exceeds the quantity demand
Excess demand: quantity demanded exceeds the quantity supplied

6. Shifts in Supply and Demand
Examples
An increase in consumers’ disposal income increase demand for a particular good
An increase in the price of labor shifts the supply curve left, equilibrium price goes up but the equilibrium quantity goes down.
Demand
Supply
Equilibrium Price
Equilibrium Quantity + - ?

7. 2.2 Price Elasticity of Demand
Measure of the rate of % change of quantity demanded with respect to price, holding all other determinants of demand constant.
Price elasticity of demand = ΕQ,P
ΕQ,P = percentage change in quantity/percentage change in price
Percentage change in quantity = ΔQ/Q x 100%
Percentage change in price = ΔP/P x 100%

8. Price Elasticity of Demand
Value of ΕQ,P = %ΔQ/ %ΔP
Classification
Meaning
Perfectly inelastic demand
Quantity demanded is completely insensitive to price
between 0 and -1
Inelastic demand
Quantity demanded is relatively insensitive to price -1
Unitary elastic demand
Percentage increase in quantity demanded is equal to percentage decrease in price
between -1 and -infinity
Elastic demand
Quantity demanded is relatively sensitive to price
-infinity
Perfectly elastic demand
Any increase in price results in quantity demanded decreasing in zero, and any decrease in price results in quantity demanded increasing to infinity

9. Linear demand curve Q=a-bP a and b are positive constants
a is the effect of all factors (income, price of other goods
b reflects how the price of the good affects the quantity demanded
Any downward-sloping demand curve has a corresponding inverse demand curve that expresses price as a function of quantity
P=(a/b)-(1/b)Q
(a/b) = choke price, price at which quantity demanded falls to 0
ΕQ,P = %ΔQ/ %ΔP = (ΔQ/ ΔP)(Q/P) = -b(P/Q)

10. Constant Elasticity Demand Curves
Q=aP-b
a and b are positive constants
For the constant elasticity demand curve, the price elasticity is always equal to the exponent –b.

11. Price Elasticity of Demand and Total Revenue
Factors
Demand tends to be more price elastic (quantity is sensitive to price) when there are good substitutes for a product
Demand tends to be more price elastic when a consumer’s expenditure on the product is large
Demand tends to be less price elastic when the product is seen by consumers as being a necessity
Market-Level versus Brand-Level Price Elasticities of Demand
If the price of one brand increases for a product market that is inelastic, the market demand for that one brand could possibly drop. The reasons this is that there are other providers of the product and the brand may not be enough to hold the customer.
Ex. Salem cigarettes increase their pricing, but smokers can easily switch to another brand

12. Other Elasticities
Income Elasticity of Demand: ratio of the percentage change of quantity demanded to the percentage change of income, holding price and all other determinants of demand constant = ΕQ,P = [(ΔQ/Q)*100] / [(ΔI/I)*100] = (ΔQ/ΔI)(I/Q)
Cross-Price Elasticity of Demand: for good i with respect to the price of good j is the ratio of the percentage change of the quantity of good I demanded to the percentage change of good j = ΕQi,Pj = [(ΔQi/Qi)*100%]/ [(ΔPj/Pj)*100%] = (ΔQi/ Δ Pj)/ (Pj/Qi)
Cross-supply elasticities can be positive or negative
ΕQi,Pj > 0, a higher price for good j increases the demand for good I
In this case, goods i and j are demand substitutes.
Demand substitutes are related goods that if one increases, demand for the other increases
ΕQi,Pj < 0, a higher price of good j decreases the demand for good i.
In this case, goods i and j are demand complements
Demand complements are related goods that if one increases, demand for the other decreases
Price Elasticity of Supply: measures the sensitivity of quantity supplied QS to price. The percentage change in quantity supplied for each percentage change in price, holding all other determinants of supply constant
ΕQS,P = [(ΔQS/QS)*100%]/ [(ΔP/P)*100%] = (ΔQS/ Δ P)/ (P/QS)

13. 2.4 Elasticity in the Long Run vs Short Run
Long-run demand curve: the demand curve that pertains to the period of tie in which consumers can fully adjust their purchase decisions to changes in price
Short-run demand curve: the demand curve that pertains to the period of time in which consumers cannot fully adjust their purchase decisions to changes in price
Long-run supply curve: the demand curve that pertains to the period of tie in which producers can fully adjust their suppy decisions to changes in price
Short-run supply curve: the supply curve that pertains to the period of time in which sellers cannot fully adjust their supply decisions in response to changes in price

14. 5.4 Market Demand
The market demand curve is the horizontal sum of the demands of the individual consumers