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IMCH2new07_2 - Chapter 2 Supply and Demand Chapter Summary...

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Chapter 2 Supply and Demand Chapter Summary This chapter covers all the basics of supply and demand analysis beginning with the definition of a market. The example of the market for lobsters in Hyannis, Massachusetts, on July 20, 2009, is used to make the discussion concrete. The chapter derives demand curves, and supply curves, and presents the concept of an equilibrium price. The section entitled "Some Welfare Properties of Equilibrium" develops the idea that if price and quantity are not at the equilibrium values, resources could be allocated so as to make everyone better off (the term "Pareto optimality" is not presented, but the discussion follows this line of thought). Examples of denied airline boarding compensation and rent control are presented to bolster the argument. The section entitled "Determinants of Supply and Demand" discusses the factors that shift demand curves and supply curves, and presents examples for each case. The following section discusses price supports in detail. The chapter concludes with the algebra of supply and demand. The appendix introduces the effects of a lump sum tax on either side of the market concluding that the effects are the same whether the tax is put on the buyer or the seller. . Chapter Outline Chapter Preview Supply and Demand Curves Equilibrium Quantity and Price Some Welfare Properties of Equilibrium Free Market and the Poor Price Supports The Rationing and Allocative Function of Price Determinants of Supply and Demand Predicting and Explaining Changes in Quantity and Price The Algebra of Supply and Demand Summary Appendix: How Do Taxes Affect Equilibrium Prices and Quantity? Teaching Suggestions 1. This chapter reviews and goes a bit beyond the supply and demand models that most students will have had in principles of microeconomics. It might be helpful to list the supply and demand curves in a slightly formal way. For example, list the demand curve as Qx = f(Px, Py, I, N, T, E), where Qx is the amount of X consumed, Px is the price of X, Py is the price of an alternative good, I is income, N is the number of buyers, T is a lump sum sales tax, and E is expectations. (If the appendix is omitted you may want to drop the T from the equation.) Now ask the students to put + or - signs under each item in parentheses to show what relationship they think exists between that item and the quantity variable. The Px is an easy minus, but the Py will be both signs depending on whether the alternative good is a substitute or a complement. Income likewise has a + or - depending on whether a good is normal or inferior. In this manner the student is then prepared for the next step. Since a demand curve has only two axes, it can deal with only the Qx and Px. Thus movement along a demand curve will relate to changes in Px only. All the other variables are held constant. If one of them is changed while Px and all the others are held constant, then the curve shifts. In like manner, the supply variables can be dealt with. For example, Qx = (Px, Pi, Te, T, E), where Pi is the price of inputs, Te is the level of technology, T is a lump sum producer tax, and E is again expectations.
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