lecture2 - Definitions Market Demand Curve: Chapter 2 A...

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Copyright © 2000 by Linda Wong 1 Chapter 2 Demand and Supply Definitions • Market: – Any group of people and firms organized for and engaged in buying and selling some good or service. Definitions • Market Demand Schedule: – A table that indicated the quantity of some good demanded across a market for various possible prices Definitions • Market Demand Curve: – A graphical representation of a market demand schedule. Slope of Demand Curves • The Quantity Demanded of most goods and services generally falls as its price increases. • It follows that Demand Curves for most goods and services are generally downward sloping. Example - The Demand for Oil Price per Barrel (dollars) Quantity Demanded (millions of barrels per year) 12 730 13 710 14 700 15 690 16 680 17 670 18 665
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Copyright © 2000 by Linda Wong 2 Price per bar el (dol ars) 15 10 Market demand curve 600 700 800 Quantity demanded (mil ions of bar els per year) 0 Figure 2.1 MARKET DEMAND CURVE FOR OIL, 1999 Copyright © 2000 by W.W. Norton & Company Figure 2.1 The Determinants of Demand for Any Good or Service • These determinants include: Time Period Consumers’ Tastes Consumers’ Incomes The Prices of Other Goods Any Good or Service • The position and shape of the demand curve are similarly dependent on these same factors. • It follows that changes in any of these can shift the demand curve. Changes That Can Shift the Demand Curve In Lower quantities demanded for all prices The good becomes less desirable to consumers Consumers’ incomes decline The prices of substitute goods fall Copyright © 2000 by W.W. Norton & Company Figure 2.2 EFFECT OF PUBLIC EMPHASIS ON ENERGY CONSERVATION ON MARKET DEMAND CURVE FOR OIL Price Quantity demanded Figure 2.2 Changes that can Shift the Demand Curve Out Higher quantities demanded for all prices The good becomes more attractive to consumers. The price of substitute goods increase.
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Copyright © 2000 by Linda Wong 3 Copyright © 2000 by W.W. Norton & Company Figure 2.3 EFFECT OF INCREASE IN PER CAPITA INCOME ON MARKET DEMAND CURVE FOR OIL Price Quantity demanded Figure 2.3 Copyright © 2000 by W.W. Norton & Company Figure 2.4 EFFECT OF INCREASE IN THE PRICE OF NATURAL GAS ON MARKET DEMAND CURVE FOR OIL Price Quantity demanded Figure 2.4 The Price Elasticity of Demand • Price elasticity measures movement along a market demand curve, or the responsiveness of the quantity demanded to changes in price. • Price elasticity of demand: η D = (percentage change in quantity demanded) / (percentage change in price) - { Q D / Q D } / { P / P } • Demand is Elastic if η D > 1. Inelastic η D < 1. • Demand displays Unitary Elasticity η D = 1. Arc Elasticity is an approximation of price elasticity with discrete combinations of price and quantity. • The mathematical definition of arc price elasticity between the quantity-price pairs (Q D1 , P 1 ) and (Q D2 2 ): η D - { (Q - Q ) / [(Q + Q )/2]} / { (P 1 - P 2 ) / [(P 1 + P 2 )/2] } Computing Arc Elasticities Price Quantity Arc Elasticity between (2,$8) and (3,$7): η D -{(2-3)/(2+3)/2]} / {(8-7) / [(8+7)/2]} = - {-1/1.5} / {1/7.5} = 3 Arc Elasticity between (4.5,$5.50) and (5.5,$4.50):
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This note was uploaded on 05/08/2011 for the course ECON 360 taught by Professor Andreaspape during the Spring '08 term at Binghamton.

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lecture2 - Definitions Market Demand Curve: Chapter 2 A...

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