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Class2_3_slides - Econ 100 Class 2&3: Demand and...

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Unformatted text preview: Econ 100 Class 2&3: Demand and Supply James Bushnell Econ 100 Winter 2012: Professor Bushnell 1 Outline (next 2+ classes) •  •  •  •  •  Demand functions Supply functions Elasticities Equilibrium Shocking the Equilibrium Econ 100 Winter 2012: Professor Bushnell 2 Demand: the demand curve •  Quantity demanded - the amount of a good that consumers are willing to buy at a given price, holding constant the other factors that influence purchases. •  Demand curve - the quantity demanded at each possible price, holding constant the other factors that influence purchases Econ 100 Winter 2012: Professor Bushnell 3 p, $ per kg A Demand Curve for Pork 14.30 Demand curve for pork, D1 0 Q, Million kg of pork per year Econ 100 Winter 2012: Professor Bushnell 4 A Demand Curve for Pork p, $ per kg Q = 286−20p 14.30 IfIfpp=ncreases by In general,$3.30 If p = 0, then i $1 86 Demand cur ve for pork, D ΔQ = -20hen, $4.30) QtΔp2(to = then, Q lope Δp = 220 =s Q = 200 1 4.30 3.30 0 Econ 100 200 220 286 Q, Million kg of pork per year Winter 2012: Professor Bushnell 5 Factors that Influence Demand •  Standard demand curve gives demand as a function of the price of the product of interest •  What else might effect demand? –  Price of substitutes (e.g. tofu) –  Price of compliments (e.g. BBQ sauce) –  Income of customers Econ 100 Winter 2012: Professor Bushnell 6 The Demand Function •  The processed pork demand function is: Q = D(p, pb, pc, Y) –  where Q is the quantity of pork demanded –  p is the price of pork (dollars per kg) –  pb is the price of beef (dollars per kg) –  pc is the price of chicken (dollars per kg) –  Y is the income of consumers (thousand dollars) Econ 100 Winter 2012: Professor Bushnell 7 From the Demand Function to the Demand Curve •  Estimated demand function for pork: Q = 171−20p + 20pb + 3pc + 2Y •  Using the values pb = 4, pc = 3.33 and Y = 12.5, we have Q = 286−20p –  Econ 100 which is the linear demand curve for pork. Winter 2012: Professor Bushnell 8 Other (non-product price) factors “shift the demand curve p , $ per kg •  Example: 0.6 $/kg Increase in price of Beef 14.30 Demand curve for pork, D1 3.30 D 1 0 220 232 Q, Million kg of pork per year Econ 100 Winter 2012: Professor Bushnell 9 Elasticities •  An Elasticity measures the relative change of something caused by a relative change something else (like prices or income) Econ 100 Winter 2012: Professor Bushnell 10 Price Elasticity of Demand •  Often called “demand elasticity” •  Why would someone want to know how elastic something is? •  Why not just use the slope (derivative) of the demand curve? Econ 100 Winter 2012: Professor Bushnell 11 Example: Linear Demand Q( p ) = a − bp € Econ 100 Winter 2012: Professor Bushnell 12 Demand Elasticity Along the Linear Pork Demand Curve Econ 100 Winter 2012: Professor Bushnell 13 Example: Constant Elasticity of Demand Q(p) = Ap￿ dQ(p) ￿−1 = ￿Ap dp dQ(p) p ￿Ap￿−1 p = =￿ ￿ dp Q Ap Econ 100 Winter 2012: Professor Bushnell 14 Constant Elasticity Demand Curves Econ 100 Winter 2012: Professor Bushnell 15 Other Elasticities •  Income elasticity percentage change in quantity demanded ∆Q/Q ∂Q Y ξ= = = percentage change in income ∆Y /Y ∂Y Q •  Cross-price elasticity percentage change in quantity demanded ∆Q/Q ∂ Q po = = percentage change in price of another good ∆po /po ∂ po Q Econ 100 Winter 2012: Professor Bushnell 16 Cross-price elasticities •  Substitutes: cross-price elasticities are positive. ∂ Q po ∂ po Q >0 –  use more of one good when the other gets more expensive •  Complements: cross-price elasticities are negative. ∂ Q po ∂ po Q <0 –  Use less of one good when the other gets more expensive Econ 100 Winter 2012: Professor Bushnell 17 Supply: the supply curve •  Quantity supplied - the amount of a good that firms want to sell at a given price, holding constant other factors that influence firms’ supply decisions, such as costs and government actions •  Supply curve - the quantity supplied at each possible price, holding constant the other factors that influence firms’ supply decisions Econ 100 Winter 2012: Professor Bushnell 18 p, $ per kg A Supply Curve An increase in the price… Supply curve, S1 5.30 3.30 causes a movement along the curve…. 0 176 220 300 Q, r theMillion kg of po k per year and an increase in quantity supplied…. Econ 100 Winter 2012: Professor Bushnell 19 Supply and non-price factors •  An increase in the price of the product (usually) brings an increase in supply of that product •  What else might effect supply? –  Price of inputs •  Wages, hogs, etc. –  Capacity •  Size, plants, etc. Econ 100 Winter 2012: Professor Bushnell 20 The Supply Function •  The processed pork supply function is: Q = S(p, ph) –  where Q is the quantity of pork supplied –  p is the price of pork (dollars per kg) –  ph is the price of a hog (dollars per kg) Econ 100 Winter 2012: Professor Bushnell 21 From the Supply Function to the Supply Curve •  Estimated demand function for pork: Q = 178 + 40p−60ph •  Using the values ph = $1.50 per kg Q = 88 + 40p. •  Econ 100 What happens to the quantity supplied if the price of hogs increases by $0.25? Winter 2012: Professor Bushnell 22 p, $ per kg A Shift of a Supply Curve A $0.25 increase in the price of hogs….. shifts the supply curve to the left S2 S1 3.30 reducing the quantity supplied at the previous price. 0 Econ 100 176 205 220 Q, Million kg of po rk per year Winter 2012: Professor Bushnell 23 Supply Elasticity •  Measures the relative price responsiveness of supply Econ 100 Winter 2012: Professor Bushnell 24 Constant Elasticity Supply Curves Econ 100 Winter 2012: Professor Bushnell 25 Aggregating Supply Curves: The Sum of Domestic and Foreign Supply Econ 100 Winter 2012: Professor Bushnell 26 Govt. Quotas and Supply Curves •  How does a quota set by the United States on foreign steel imports of Q affect the total American supply curve for steel given the domestic supply, Sd in panel a of the graph, and foreign supply, Sf in panel b? Econ 100 Winter 2012: Professor Bushnell 27 Truncating Foreign Supply Econ 100 Winter 2012: Professor Bushnell 28 ...
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This note was uploaded on 02/01/2012 for the course ECN 100 taught by Professor Parman during the Winter '08 term at UC Davis.

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