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# Chapter 02 - 24.02.2011 Chapter 2 Supply and Demand Talk is...

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24.02.2011 1 Chapter 2 Supply and Demand Talk is cheap because supply exceeds demand. ECON201 Spring 2011 2-2 Chapter 2 Outline 2.1 Demand 2.2 Supply 2.3 Market Equilibrium 2.4 Shocking the Equilibrium: Comparative Statistics 2.5 Elasticities 2.6 Effects of a Sales Tax 2.7 Quantity Supplied Need Not Equal Quantity Demanded 2.8 When to Use the Supply-and-Demand Model ECON201 Spring 2011 2-3 2.1 Demand The quantity of a good or service that consumers demand depends on price and other factors such as consumers’ incomes and the prices of related goods. The demand function describes the mathematical relationship between quantity demanded ( Q d ), price ( p ) and other factors that influence purchases: p = per unit price of the good or service p s = per unit price of a substitute good p c = per unit price of a complementary good Y = consumers’ income

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24.02.2011 2 ECON201 Spring 2011 2-4 2.1 Demand We often work with a linear demand function . Example: estimated demand function for pork in Canada. Q d = quantity of pork demanded (million kg per year) p = price of pork (in Canadian dollars per kg) p b = price of beef, a substitute good (in Canadian dollars per kg) p c = price of chicken, another substitute (in Canadian dollars per kg) Y = consumers’ income (in Canadian dollars per year) Graphically, we can only depict the relationship between Q d and p , so we hold the other factors constant. ECON201 Spring 2011 2-5 2.1 Demand Example Assumptions about p b , p c , and Y to simplify equation p b = \$4/kg p c = \$3.33/kg Y = \$12.5 thousand ECON201 Spring 2011 2-6 2.1 Demand Example Changing the own- price of pork simply moves us along an existing demand curve. Changing one of the things held constant (e.g. p b , p c , and Y ) shifts the entire demand curve. p b to \$4.60 /kg
24.02.2011 3 ECON201 Spring 2011 2-7 2.2 Supply The quantity of a good or service that firms supply depends on price and other factors such as the cost of inputs that firms use to produce the good or service. The supply function describes the mathematical relationship between quantity supplied ( Q s ), price ( p ) and other factors that influence the number of units offered for sale: p = per unit price of the good or service p h = per unit price of other production factors ECON201 Spring 2011 2-8 2.2 Supply We often work with a linear supply function . Example: estimated supply function for pork in Canada. Q s = quantity of pork supplied (million kg per year) p = price of pork (in Canadian dollars per kg) p h = price of hogs, an input (in Canadian dollars per kg) Graphically, we can only depict the relationship between Q s and p , so we hold the other factors constant. ECON201 Spring 2011 2-9 Assumption about p h to simplify equation p h = \$1.50/kg 40 dp dQ s slope dQ dp s 40 1 2.2 Supply Example

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24.02.2011 4 ECON201 Spring 2011 2-10 2.2 Supply Example Changing the own- price of pork simply moves us along an existing supply curve.
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