Comm220 Ch 2 - Source Pindyck and Rubinfeld(2009...

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Unformatted text preview: Source: Pindyck and Rubinfeld (2009), Microeconomics , 7 th Ed., Pearson Prentice Hall, Chapter 2. 1 CHAPTER 2 – THE BASICS OF SUPPLY AND DEMAND Key Concepts and Topics • Supply and Demand • The Market Mechanism • Changes in Market Equilibrium • Elasticities of Supply and Demand • Understanding and Predicting the Effects of Changing Market Conditions • Effects of Government Intervention – Price Controls Supply and Demand • Why and how prices change – How world economic conditions affect market price and production • What happens when the government intervenes in a competitive market – The impact of price controls, minimum wages, price supports, and production incentives on the economy – How taxes, subsidies, tariffs and import quotas affect consumers and producers The Supply Curve • The relationship between the quantity of a good that producers are willing to sell and the price of the good, holding other supply-determining factors (e.g., wages, interest charges, raw material costs, etc.) constant, Q S = Q S (P) Quantity Price ($ per unit) Q 1 Q 2 P 2 P 1 The Supply Curve slopes upward demonstrating that at higher prices more firms are able and willing to increase output Source: Pindyck and Rubinfeld (2009), Microeconomics , 7 th Ed., Pearson Prentice Hall, Chapter 2. 2 • When the supply-determining factors change, say, lower (higher) production costs, the entire supply curve shifts to the right ( left). Therefore, greater (lesser) quantity supplied at the same price, or same quantity supplied at a lower (higher) price • Change in Q S caused by – Price change – movement along the supply curve – Changes in supply-determining factors – shift of the supply curve The Demand Curve • The relationship between the quantity of a good that consumers are willing to buy and the price of the good, holding other demand-determining factors (e.g., incomes, tastes, weather, prices of substitute and complementary goods, etc.) constant, Q D = Q D (P) Q 3 Q 1 Q 2 Q P P 2 Quantity Price ($ per unit) Q 2 P 2 P 1 The Demand Curve slopes downward demonstrating that less consumers are able and willing to buy at a higher price Q 1 P 1 P 3 Source: Pindyck and Rubinfeld (2009), Microeconomics , 7 th Ed., Pearson Prentice Hall, Chapter 2. 3 • When the demand-determining factors change, say, consumer incomes increase (decrease), the entire demand curve shifts to the right (left). Hence, greater (lesser) quantity demanded at the same price, or same quantity demanded at a higher (lower) price. • Change in Q D caused by – Price change – movement along the demand curve – Changes in demand-determining factors – shift of the demand curve The Market Mechanism • The tendency in a free market for price to change until the market clears, i.e., Q D = Q S at the market-clearing (equilibrium) price P 2 P 1 Q 3 Q 1 Q 2 Q P P Q Quantity Price ($ per unit) The curves intersect at equilibrium, or market-clearing price, P , where Q D = Q S P 3 Source: Pindyck and Rubinfeld (2009),...
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Comm220 Ch 2 - Source Pindyck and Rubinfeld(2009...

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