1. Chapter 2 The Basics of Supply and Demand

2. Chapter 22 Qustion: Suppose you bought an apple for 1,000 Won. Why 1,000 Won? Who determined it?

3. Chapter 23 D S P0P0 Q0Q0 Quantity Price ($ per unit)

4. Chapter 24 Supply and Demand The Supply Curve  The relationship between the quantity of a good that producers are willing to sell and the price of the good.  Measures quantity on the x-axis and price on the y-axis

5. Chapter 25 The Supply Curve S Quantity Price ($ per unit) P1P1 Q1Q1 P2P2 Q2Q2

6. Chapter 26 The Supply Curve Other Variables Affecting Supply  Costs of Production  Lower costs of production allow a firm to produce more at each price and vice versa

7. Chapter 27 Change in Supply The cost of raw materials falls P S Q P1P1 P2P2 Q1Q1 Q0Q0 S’ Q2Q2

8. Chapter 28 The Supply Curve Change in Quantity Supplied  Movement along the curve caused by a change in price Change in Supply  Shift of the curve caused by a change in something other than price

9. Chapter 29 Supply and Demand The Demand Curve  The relationship between the quantity of a good that consumers are willing to buy and the price of the good.  Measures quantity on the x-axis and price on the y-axis

10. Chapter 210 The Demand Curve D Quantity Price ($ per unit) P2P2 Q1Q1 P1P1 Q2Q2

11. Chapter 211 The Demand Curve Other Variables Affecting Demand  Income  Consumer Tastes  Price of Related Goods Substitutes Complements

12. Chapter 212 D P Q D’ Q1Q1 P2P2 Q0Q0 P1P1 Q2Q2 Change in Demand Income Increases

13. Chapter 213 The Demand Curve Changes in quantity demanded  Movements along the demand curve caused by a change in price. Changes in demand  A shift of the entire demand curve caused by something other than price.

14. Chapter 214 The Market Mechanism Markets clear when quantity demanded equals quantity supplied at the prevailing price Market Clearing price – price at which markets clear

15. Chapter 215 The Market Mechanism D S P0P0 Q0Q0 Quantity Price ($ per unit)

16. Chapter 216 The Market Mechanism D S P0P0 Q0Q0 Quantity Price ($ per unit)

17. Chapter 217 The Market Mechanism In equilibrium  There is no shortage or excess demand  There is no surplus or excess supply  Quantity supplied equals quantity demanded What if P > P o ? Or P < P o ?

18. Chapter 218 The Market Mechanism D S P0P0 Q0Q0 P1P1 Surplus Quantity Price ($ per unit) QSQS QDQD

19. Chapter 219 The Market Mechanism D S QSQS QDQD P2P2 Quantity Price ($ per unit) Q3Q3 P3P3 Shortage

20. Chapter 220 S’ Changes In Market Equilibrium When raw material prices fall P Q S D P3P3 Q3Q3 Q1Q1 P1P1 Q2Q2

21. Chapter 221 D’ S D Q3Q3 P3P3 Changes In Market Equilibrium When income increases P Q Q1Q1 P1P1 Q2Q2

22. Chapter 222 D’ S’ Changes In Market Equilibrium When income increases & raw material prices fall P Q S P2P2 Q2Q2 D P1P1 Q1Q1

23. Changes In Market Equilibrium Question: Why do the prices of some goods, like apples, go down during the months of heaviest consumption while others, like beachfront cottages, go up? Chapter 223

24. Chapter 224 Q: KORAIL’s Problem Seoul-Chuncheon line: Deficit What to do?  Raise the price?

25. Chapter 225 Price Elasticity of Demand Measures the sensitivity of quantity demanded to price changes.  It measures the percentage change in the quantity demanded of a good that results from a one percent change in price.

26. Chapter 226 Price Elasticity of Demand The percentage change in a variable is the absolute change in the variable divided by the original level of the variable. Therefore, elasticity can also be written as:

27. Chapter 227 Price Elasticity of Demand E P : Usually a negative number When E P > 1, the good is price elastic  %  Q > %  P When E P < 1, the good is price inelastic  %  Q < %  P

28. Chapter 228 Price Elasticity of Demand Q P rice 4 8 2 4 E p = -1 E p = 0 E P = -  Elastic Inelastic Demand Curve Q = 8 – 2P

29. Chapter 229 Price Elasticity of Demand Two extreme cases of demand curves  Completely inelastic demand – vertical  Infinitely elastic demand - horizontal

30. Chapter 230 Infinitely Elastic Demand D P*P* Quantity Price E P = 

31. Chapter 231 Completely Inelastic Demand Quantity Price Q*Q* D E P = 0

32. Chapter 232 Other Demand Elasticities Income Elasticity of Demand  Measures how much quantity demanded changes with a change in income.

33. Chapter 233 Other Demand Elasticities Cross Elasticity of Demand  Measures the percentage change in the quantity demanded of one good that results from a one percent change in the price of another good.

34. Chapter 234 Other Demand Elasticities Complements: Cars and Tires  Cross elasticity of demand is negative Substitutes: Butter and Margarine  Cross elasticity of demand is positive

35. Chapter 235 Price Elasticity of Supply Measures the sensitivity of quantity supplied given a change in price  Measures the percentage change in quantity supplied resulting from a 1 percent change in price.

36. Chapter 236 Q: Rent Control Chuncheon City decided to control rent around KNU campus for students. Are KNU students going to be better off?

37. Chapter 237 D Effects of Price Controls Quantity P rice P0P0 Q0Q0 S P max QSQS QDQD Shortage

38. Chapter 238 Effects of Price Controls Markets are rarely free of government intervention  Imposed taxes and granted subsidies  Price controls Price controls usually hold the price above or below the equilibrium price  Excess demand – shortage  Excess supply - surplus

39. hapter 239 Effects of Price Controls Excess demand sometimes takes the form of queues  Lines at gas stations during 1974 shortage Sometimes get curtailments and supply rationing  Natural gas shortage of the mid ’70’s Producers typically lose, but some consumers gain. Some consumers lose.