微观经济学第六版课后答案 微观经济学 英文原版 CH02PINDYCK课件

Chapter2TheBasicsofSupplyandDemand©2005PearsonEducation,Inc.1Chapter2Chapter2TheBasicsofSupply©IntroductionWhataresupplyanddemand?Whatisthemarketmechanism?Whataretheeffectsofchangesinmarketequilibrium?Whatareelasticitiesofsupplyanddemand?©2005PearsonEducation,Inc.2Chapter2IntroductionWhataresupplyanTopicstoBeDiscussedHowdoshort-runandlong-runelasticitiesdiffer?Howdoweunderstandandpredicttheeffectsofchangingmarketconditions?Whataretheeffectsofgovernmentintervention–pricecontrols?©2005PearsonEducation,Inc.3Chapter2TopicstoBeDiscussedHowdoSupplyandDemandSupplyanddemandanalysiscan:HelpusunderstandandpredicthowrealworldeconomicconditionsaffectmarketpriceandproductionAnalyzetheimpactofgovernmentpricecontrols,minimumwages,pricesupports,andproductionincentivesontheeconomyDeterminehowtaxes,subsidies,tariffsandimportquotasaffectconsumersandproducers©2005PearsonEducation,Inc.4Chapter2SupplyandDemandSupplyanddeSupplyandDemandTheSupplyCurveTherelationshipbetweenthequantityofagoodthatproducersarewillingtosellandthepriceofthegoodMeasuresquantityonthex-axisandpriceonthey-axis©2005PearsonEducation,Inc.5Chapter2SupplyandDemandTheSupplyCuTheSupplyCurveSThesupplycurveslopesupward,demonstratingthatathigherpricesfirmswillincreaseoutputTheSupplyCurve,GraphicallyDepictedQuantity

Price($perunit)

P1Q1P2Q2©2005PearsonEducation,Inc.6Chapter2TheSupplyCurveSThesupplycuTheSupplyCurveOtherVariablesAffectingSupplyCostsofProductionLaborCapitalRawMaterialsLowercostsofproductionallowafirmtoproducemoreateachpriceandviceversa©2005PearsonEducation,Inc.7Chapter2TheSupplyCurveOtherVariableChangeinSupplyThecostofrawmaterialsfallsProducedQ1atP1andQ0atP2NowproduceQ2atP1andQ1atP2SupplycurveshiftsrighttoS’PSQP1P2Q1Q0S’Q2©2005PearsonEducation,Inc.8Chapter2ChangeinSupplyThecostofraTheSupplyCurveChangeinQuantitySuppliedMovementalongthecurvecausedbyachangeinpriceChangeinSupplyShiftofthecurvecausedbyachangeinsomethingotherthanthepriceofthegoodChangeincostsofproduction©2005PearsonEducation,Inc.9Chapter2TheSupplyCurveChangeinQuanSupplyandDemandTheDemandCurveTherelationshipbetweenthequantityofagoodthatconsumersarewillingtobuyandthepriceofthegoodMeasuresquantityonthex-axisandpriceonthey-axis©2005PearsonEducation,Inc.10Chapter2SupplyandDemandTheDemandCuTheDemandCurveDThedemandcurveslopesdownward,demonstratingthatconsumersarewillingtobuymoreatalowerpriceastheproductbecomesrelativelycheaper.Quantity

Price($perunit)P2Q1P1Q2©2005PearsonEducation,Inc.11Chapter2TheDemandCurveDThedemandcuTheDemandCurveOtherVariablesAffectingDemandIncomeIncreasesinincomeallowconsumerstopurchasemoreatallpricesConsumerTastesPriceofRelatedGoodsSubstitutesComplements©2005PearsonEducation,Inc.12Chapter2TheDemandCurveOtherVariableDPQD’Q1P2Q0P1Q2ChangeinDemandIncomeIncreasesPurchasedQ0,atP2andQ1atP1NowpurchasedQ1atP2andQ2atP1SameforallpricesDemandcurveshiftsright©2005PearsonEducation,Inc.13Chapter2DPQD’Q1P2Q0P1Q2ChangeinDemanTheDemandCurveChangesinquantitydemandedMovementsalongthedemandcurvecausedbyachangeinpriceChangesindemandAshiftoftheentiredemandcurvecausedbysomethingotherthanpriceIncomePreferences©2005PearsonEducation,Inc.14Chapter2TheDemandCurveChangesinquaTheMarketMechanismThemarketmechanismisthetendencyinafreemarketforpricetochangeuntilthemarketclearsMarketsclearwhenquantitydemandedequalsquantitysuppliedattheprevailingpriceMarketclearingprice–priceatwhichmarketsclear©2005PearsonEducation,Inc.15Chapter2TheMarketMechanismThemarketTheMarketMechanismDSThecurvesintersectatequilibrium,ormarket-clearing,price.QuantitydemandedequalsquantitysuppliedatP0P0Q0Quantity

Price($perunit)©2005PearsonEducation,Inc.16Chapter2TheMarketMechanismDSThecurvTheMarketMechanismInequilibriumThereisnoshortageorexcessdemandThereisnosurplusorexcesssupplyQuantitysuppliedequalsquantitydemandedAnyonewhowantstobuyatthecurrentpricecanandallproducerswhowanttosellatthatpricecan©2005PearsonEducation,Inc.17Chapter2TheMarketMechanismInequilibMarketSurplus1ThemarketpriceisaboveequilibriumThereisexcesssupply-surplusDownwardpressureonpriceQuantitydemandedincreasesandquantitysupplieddecreasesThemarketadjustsuntilnewequilibriumisreached©2005PearsonEducation,Inc.18Chapter2MarketSurplus1ThemarketpricTheMarketMechanismDSP0Q0AtP1,priceisabovethemarketclearingpriceQs>QDPricefallstothemarket-clearingpriceMarketadjuststoequilibriumP1SurplusQuantity

Price($perunit)QSQD©2005PearsonEducation,Inc.19Chapter2TheMarketMechanismDSP0Q0AtPTheMarketMechanismThemarketpriceisbelowequilibrium:Thereisexcessdemand-shortageUpwardpressureonpricesQuantitydemandeddecreasesandquantitysuppliedincreasesThemarketadjustsuntilthenewequilibriumisreached©2005PearsonEducation,Inc.20Chapter2TheMarketMechanismThemarketTheMarketMechanismDSQSQDP2Quantity

Price($perunit)AtP2,priceisbelowthemarketclearingpriceQD>QSPricerisestothemarket-clearingpriceMarketadjuststoequilibriumQ3P3Shortage©2005PearsonEducation,Inc.21Chapter2TheMarketMechanismDSQSQDP2QuTheMarketMechanismSupplyanddemandinteracttodeterminethemarket-clearingpriceWhennotinequilibrium,themarketwilladjusttoalleviateashortageorsurplusandreturnthemarkettoequilibriumMarketsmustbecompetitiveforthemechanismtobeefficient©2005PearsonEducation,Inc.22Chapter2TheMarketMechanismSupplyandChangesinMarketEquilibriumEquilibriumpricesaredeterminedbytherelativelevelofsupplyanddemandChangesinsupplyand/ordemandwillcausechangeintheequilibriumpriceand/orquantityinafreemarket©2005PearsonEducation,Inc.23Chapter2ChangesinMarketEquilibriumES’ChangesinMarketEquilibriumRawmaterialpricesfallSshiftstoS’SurplusatP1betweenQ1,Q2PriceadjuststoequilibriumatP3,Q3

PQSDP3Q3Q1P1Q2©2005PearsonEducation,Inc.24Chapter2S’ChangesinMarketEquilibriuD’SDQ3P3ChangesinMarketEquilibriumIncomeIncreasesDemandincreasestoD’ShortageatP1ofQ1toQ2EquilibriumatP3andQ3

PQQ1P1Q2©2005PearsonEducation,Inc.25Chapter2D’SDQ3P3ChangesinMarketEquiD’S’ChangesinMarketEquilibriumIncomeincreasesandrawmaterialpricesfallQuantityincreasesIftheincreaseinDisgreaterthantheincreaseinSpricealsoincreasesPQSP2Q2DP1Q1©2005PearsonEducation,Inc.26Chapter2D’S’ChangesinMarketEquilibrShiftsinSupplyandDemandWhensupplyanddemandchangesimultaneously,theimpactontheequilibriumpriceandquantityisdeterminedby:TherelativesizeanddirectionofthechangeTheshapeofthesupplyanddemandmodels©2005PearsonEducation,Inc.27Chapter2ShiftsinSupplyandDemandWheThePriceofaCollegeEducationTherealpriceofacollegeeducationrose55percentfrom1970to2002Increasesincostsofmodernclassroomsandwagesincreasedcostsofproduction–decreaseinsupplyDuetoalargerpercentageofhighschoolgraduatesattendingcollege,demandincreased©2005PearsonEducation,Inc.28Chapter2ThePriceofaCollegeEducatiMarketforaCollegeEducationQ(millionsenrolled))

P(annualcostin1970dollars)

D1970S1970S2002D2002$3,91713.2Newequilibriumwasreachedat$4,573andaquantityof12.3millionstudents$2,5308.6©2005PearsonEducation,Inc.29Chapter2MarketforaCollegeEducationTheLong-RunBehavior

ofNaturalResourcePricesConsumptionofcopperhasincreasedaboutahundredfoldfrom1880through2002ThelongtermrealpriceforcopperhasremainedrelativelyconstantIncreaseddemandasworldeconomygrewDecreasedproductioncostsincreasedsupply©2005PearsonEducation,Inc.30Chapter2TheLong-RunBehavior

ofNaturS2002D2002D1900S1900S1950D1950Long-RunPathofPriceandConsumptionResourceMarketEquilibriumQuantity

Price©2005PearsonEducation,Inc.31Chapter2S2002D2002D1900S1900S1950D1950ResourceMarketConclusionDecreasesinthecostsofproductionhaveincreasedthesupplybymorethanenoughtooffsettheincreaseindemand©2005PearsonEducation,Inc.32Chapter2ResourceMarketConclusion©2005ElasticitiesofSupplyandDemandNotonlyareweconcernedwithwhatdirectionpriceandquantitywillmovewhenthemarketchanges,butweareconcernedabouthowmuchtheychangeElasticitygivesawaytomeasurebyhowmuchavariablewillchangewiththechangeinanothervariableSpecifically,itgivesthepercentagechangeinonevariableresultingfromaonepercentchangeinanother©2005PearsonEducation,Inc.33Chapter2ElasticitiesofSupplyandDemPriceElasticityofDemandMeasuresthesensitivityofquantitydemandedtopricechangesItmeasuresthepercentagechangeinthequantitydemandedofagoodthatresultsfromaonepercentchangeinprice©2005PearsonEducation,Inc.34Chapter2PriceElasticityofDemandMeasPriceElasticityofDemandThepercentagechangeinavariableistheabsolutechangeinthevariabledividedbytheoriginallevelofthevariableTherefore,elasticitycanalsobewrittenas:©2005PearsonEducation,Inc.35Chapter2PriceElasticityofDemandThePriceElasticityofDemandUsuallyanegativenumberAspriceincreases,quantitydecreasesAspricedecreases,quantityincreasesWhen|EP|>1,thegoodispriceelastic|%Q|>|%P|When|EP|<1,thegoodispriceinelastic|%Q|<|%P|©2005PearsonEducation,Inc.36Chapter2PriceElasticityofDemandUsuaPriceElasticityofDemandTheprimarydeterminantofpriceelasticityofdemandistheavailabilityofsubstitutesManysubstitutes,demandispriceelasticCaneasilymovetoanothergoodwithpriceincreasesFewsubstitutes,demandispriceinelastic©2005PearsonEducation,Inc.37Chapter2PriceElasticityofDemandThePriceElasticityofDemandLookingatalineardemandcurve,aswemovealongthecurveQ/Pisconstant,butPandQwillchangePriceelasticityofdemandmustthereforebemeasuredataparticularpointonthedemandcurveElasticitywillchangealongthedemandcurveinaparticularway©2005PearsonEducation,Inc.38Chapter2PriceElasticityofDemandLookPriceElasticityofDemandGivenalineardemandcurveElasticitydependsonslopeandonthevaluesofPandQThetopportionofdemandcurveiselasticPriceishighandquantitysmallThebottomportionofdemandcurveisinelasticPriceislowandquantityhigh©2005PearsonEducation,Inc.39Chapter2PriceElasticityofDemandGivePriceElasticityofDemandQPrice4824Ep=-1Ep=0EP=-ElasticInelasticDemandCurveQ=8–2P©2005PearsonEducation,Inc.40Chapter2PriceElasticityofDemandQPriPriceElasticityofDemandThesteeperthedemandcurve,themoreinelasticthedemandforthegoodbecomesTheflatterthedemandcurve,themoreelasticthethedemandforthegoodbecomesTwoextremecasesofdemandcurvesCompletelyinelasticdemand–verticalInfinitelyelasticdemand–horizontal©2005PearsonEducation,Inc.41Chapter2PriceElasticityofDemandTheInfinitelyElasticDemandDP*Quantity

PriceEP=©2005PearsonEducation,Inc.42Chapter2InfinitelyElasticDemandDP*QuCompletelyInelasticDemandQuantity

PriceQ*DEP=0©2005PearsonEducation,Inc.43Chapter2CompletelyInelasticDemandQuaOtherDemandElasticitiesIncomeElasticityofDemandMeasureshowmuchquantitydemandedchangeswithachangeinincome©2005PearsonEducation,Inc.44Chapter2OtherDemandElasticitiesIncomOtherDemandElasticitiesCross-PriceElasticityofDemandMeasuresthepercentagechangeinthequantitydemandedofonegoodthatresultsfromaonepercentchangeinthepriceofanothergood©2005PearsonEducation,Inc.45Chapter2OtherDemandElasticitiesCrossOtherDemandElasticitiesComplements:CarsandTiresCross-priceelasticityofdemandisnegativePriceofcarsincreases,quantitydemandedoftiresdecreasesSubstitutes:ButterandMargarineCross-priceelasticityofdemandispositivePriceofbutterincreases,quantityofmargarinedemandedincreases©2005PearsonEducation,Inc.46Chapter2OtherDemandElasticitiesComplPriceElasticityofSupplyMeasuresthesensitivityofquantitysuppliedgivenachangeinpriceMeasuresthepercentagechangeinquantitysuppliedresultingfroma1percentchangeinprice©2005PearsonEducation,Inc.47Chapter2PriceElasticityofSupplyMeas

Pointvs.ArcElasticitiesPointelasticityofdemandPriceelasticityofdemandataparticularpointonthedemandcurveArcelasticityofdemandPriceelasticityofdemandcalculatedoverarangeofprices©2005PearsonEducation,Inc.48Chapter2

Pointvs.ArcElasticitiesPoiElasticity:AnApplicationDuringthe1980’sand1990’s,themarketforwheatwentthroughchangesthathadgreatimplicationsforAmericanfarmersandUSagriculturalpolicyUsingthesupplyanddemandcurvesforwheat,wecananalyzewhatoccurredinthismarket©2005PearsonEducation,Inc.49Chapter2Elasticity:AnApplicationDuriElasticity:AnApplicationSupply:QS=1900+24PDemand:QD=3550–266P©2005PearsonEducation,Inc.50Chapter2Elasticity:AnApplicationSuppElasticity:AnApplicationQD=QS1800+240P=3550–266P506P=1750P=$3.46perbushelQ=1800+(240)(3.46)=2630millionbushels©2005PearsonEducation,Inc.51Chapter2Elasticity:AnApplicationQD=Elasticity:AnApplicationWecanfindtheelasticitiesofdemandandsupplyatthesepoints©2005PearsonEducation,Inc.52Chapter2Elasticity:AnApplicationWecElasticity:AnApplicationAssumethepriceofwheatis$4.00/bushelduetodecreaseinsupply©2005PearsonEducation,Inc.53Chapter2Elasticity:AnApplicationAssuElasticity:AnApplicationIn2002,thesupplyanddemandforwheatwere:Supply:QS=1439+267PDemand:QD=2809–226P©2005PearsonEducation,Inc.54Chapter2Elasticity:AnApplicationIn2Elasticity:AnApplicationQD=QS2809-226P=1439+267PP=$2.78perbushelQ=2809-(226)(2.78)=2181millionbushelsPriceofwheatfellinnominalterms.©2005PearsonEducation,Inc.55Chapter2Elasticity:AnApplicationQD=Short-RunVersusLong-RunElasticityPriceelasticityvarieswiththeamountoftimeconsumershavetorespondtoapriceShort-rundemandandsupplycurvesoftenlookverydifferentfromtheirlong-runcounterparts©2005PearsonEducation,Inc.56Chapter2Short-RunVersusLong-RunElasShort-RunVersusLong-RunElasticityDemandIngeneral,demandismuchmorepriceelasticinthelongrunConsumerstaketimetoadjustconsumptionhabitsDemandmightbelinkedtoanothergoodthatchangesslowlyMoresubstitutesareusuallyavailableinthelongrun©2005PearsonEducation,Inc.57Chapter2Short-RunVersusLong-RunElasGasoline:Short-RunandLong-RunDemandCurvesDSRDLRPeoplecannoteasilyadjustconsumptionintheshortrun.Inthelongrun,peopletendtodrivesmallerandmorefuelefficientcars.QuantityofGas

Price©2005PearsonEducation,Inc.58Chapter2Gasoline:Short-RunandLong-RShort-RunVersusLong-RunElasticityDemandandDurabilityForsomedurablegoods,demandismoreelasticintheshortrunIfgoodsaredurable,thenwhenpriceincreases,consumerschoosetoholdontothegoodinsteadofreplacingitButinlongrun,olderdurablegoodswillhavetobereplaced©2005PearsonEducation,Inc.59Chapter2Short-RunVersusLong-RunElasDSRDLRInitially,peoplemayputoffimmediatecarpurchaseInlongrun,oldercarsmustbereplacedCars:Short-RunandLong-RunDemandCurvesQuantityofCars

Price©2005PearsonEducation,Inc.60Chapter2DSRDLRInitially,peoplemaypShort-RunVersusLong-RunElasticityIncomeelasticityalsovarieswiththeamountoftimeconsumershavetorespondtoanincomechangeFormostgoodsandservices,incomeelasticityislargerinthelongrunWhenincomechanges,ittakestimetoadjustspending©2005PearsonEducation,Inc.61Chapter2Short-RunVersusLong-RunElasShort-RunVersusLong-RunElasticityIncomeelasticityofdurablegoodsIncomeelasticityislessinthelongrunthanintheshortrunIncreasesinincomemeanconsumerswillwanttoholdmorecarsOnceoldercarsarereplaced,purchaseswillonlybetoreplaceoldcarsLesspurchasesfromincomeincreaseinlongrunthaninshortrun©2005PearsonEducation,Inc.62Chapter2Short-RunVersusLong-RunElasDemandforGasoline©2005PearsonEducation,Inc.63Chapter2DemandforGasoline©2005PearsDemandforAutomobiles©2005PearsonEducation,Inc.64Chapter2DemandforAutomobiles©2005PeShort-RunVersusLong-RunElasticityMostgoodsandservices:Long-runpriceelasticityofsupplyisgreaterthanshort-runpriceelasticityofsupplyOtherGoods(durables,recyclables):Long-runpriceelasticityofsupplyislessthanshort-runpriceelasticityofsupply©2005PearsonEducation,Inc.65Chapter2Short-RunVersusLong-RunElasSSRQuantityPrimaryCopper

PriceShort-RunVersusLong-RunElasticitySLRDuetolimitedcapacity,firmsarelimitedbyoutputconstraintsintheshortrun.Inthelongrun,theycanexpand.©2005PearsonEducation,Inc.66Chapter2SSRQuantityPrimaryCopperPriSSRQuantitySecondaryCopper

PriceShort-RunVersusLong-RunElasticitySLRPriceincreasesprovideanincentivetoconvertscrapcopperintonewsupply.Inthelongrun,thisstockofscrapcopperbeginstofall.©2005PearsonEducation,Inc.67Chapter2SSRQuantitySecondaryCopperPSupplyofCopper©2005PearsonEducation,Inc.68Chapter2SupplyofCopper©2005PearsonShort-Runvs.Long-RunElasticity–AnApplicationWhyarecoffeepricesveryvolatile?Mostoftheworld’scoffeeisproducedinBrazilManychangingweatherconditionsaffectthecropofcoffee,therebyaffectingpricePricefollowingbadweatherconditionsisusuallyshort-livedInlongrun,pricescomebacktooriginallevels,allelseequal©2005PearsonEducation,Inc.69Chapter2Short-Runvs.Long-RunElasticPriceofBrazilianCoffee©2005PearsonEducation,Inc.70Chapter2PriceofBrazilianCoffee©2005Short-Runvs.Long-RunElasticity–AnApplicationDemandandsupplyaremoreelasticinthelongrunIntheshortrun,supplyiscompletelyinelasticWeathermaydestroypartofthefixedsupply,decreasingsupplyDemandisrelativelyinelasticaswellPriceincreasessignificantly©2005PearsonEducation,Inc.71Chapter2Short-Runvs.Long-RunElasticDP0SQ0Quantity

PriceAfreezeordroughtdecreasesthesupplyofcoffeeS’Q1AnApplication-CoffeePriceincreasessignificantlyduetoinelasticsupplyanddemandP1©2005PearsonEducation,Inc.72Chapter2DP0SQ0QuantityPriceAfreezeoS’DSP0Q0P2Q2Intermediate-Run1)Supplyanddemandaremoreelastic2)PricefallsbacktoP2.AnApplication-CoffeeQuantity

Price©2005PearsonEducation,Inc.73Chapter2S’DSP0Q0P2Q2Intermediate-RunAnSP0Q0Long-Run1)Supplyisextremelyelastic2)PricefallsbacktoP0.3)QuantitybacktoQ0.AnApplication-CoffeeQuantity

PriceD©2005PearsonEducation,Inc.74Chapter2SP0Q0Long-RunAnApplication-PredictingtheEffectsofChangingMarketConditionsSupplyanddemandanalysiscanbeusedtopredicttheeffectsofchangingmarketconditionsLineardemandandsupplymustbefittomarketdataGivenequilibriumpriceandquantityalongwithelasticitiesofsupplyanddemand,wecancalculatethecurvesthatfittheinformationWecanthencalculatechangesinthemarket©2005PearsonEducation,Inc.75Chapter2PredictingtheEffectsofChanPredictingtheEffectsofChangingMarketConditionsWeknowEquilibriumPrice,P*EquilibriumQuantity,Q*Priceelasticityofsupply,ESPriceelasticityofdemand,ED©2005PearsonEducation,Inc.76Chapter2PredictingtheEffectsofChanPredictingtheEffectsofChangingMarketConditionsLet’sbeginwiththeequationsforsupply,demand,elasticity:Demand:Q=a–bPSupply:Q=c+dPElasticity:(P/Q)(Q/P)Wemustcalculatenumbersfora,b,c,andd.©2005PearsonEducation,Inc.77Chapter2PredictingtheEffectsofChanPredictingtheEffectsofChangingMarketConditionsTheslopeofthedemandcurveaboveequalsQ/Pwhichequals-bTheslopeofthesupplycurveaboveequalsQ/PwhichequalsdDemand:ED=-b(P*/Q*)Supply:ES=d(P*/Q*)©2005PearsonEducation,Inc.78Chapter2PredictingtheEffectsofChanDemand:Q=a-bPa/bSupply:Q=c+dP-c/dP*Q*ED=-bP*/Q*ES=dP*/Q*PredictingtheEffectsofChangingMarketConditionsQuantity

Price©2005PearsonEducation,Inc.79Chapter2Demand:Q=a-bPa/bSupply:QPredictingtheEffectsofChangingMarketConditionsUsingP*,Q*andtheelasticities,wecansolveforbandcfromsupplyES=d(P*/Q*)1.6=d(0.75/7.5)=0.1dd=16Q=c+dP7.5=c+(16)(0.75)=c+12c=-4.5©2005PearsonEducation,Inc.80Chapter2PredictingtheEffectsofChanPredictingtheEffectsofChangingMarketConditionsUsingP*,Q*andtheelasticities,wecansolveforaandbfromdemandED=–b(P*/Q*)-0.8=-b(0.75/7.5)=–0.1bb=8Q=a–bP7.5=a–(8)(0.75)=a–6a=13.5©2005PearsonEducation,Inc.81Chapter2PredictingtheEffectsofChanPredictingtheEffectsofChangingMarketConditionsWenowhaveequationsforsupplyanddemandSupply:Q=–4.5+16PDemand:Q=13.5–8PSettingthemequalwillgiveusequilibriumpriceandquantitywithwhichwebegan©2005PearsonEducation,Inc.82Chapter2PredictingtheEffectsofChanSupply:QS=-4.5+16P-c/dDemand:QD=13.5-8Pa/b.757.5PredictingtheEffectsofChangingMarketConditionsMmt/yr

Price©2005PearsonEducation,Inc.83Chapter2Supply:QS=-4.5+16P-c/dDemPredictingtheEffectsofChangingMarketConditionsWehavewrittensupplyanddemandsothattheyonlydependuponpriceDemandcouldalsodependuponothervariablessuchasincomeDemandwouldthenbewrittenas:©2005PearsonEducation,Inc.84Chapter2PredictingtheEffectsofChanPredictingtheEffectsofChangingMarketConditionsWeknowthefollowinginformationregardingthecopperindustry:I=1.0P*=0.75Q*=7.5b=8Incomeelasticity:EI=1.3©2005PearsonEducation,Inc.85Chapter2PredictingtheEffectsofChanPredictingtheEffectsofChangingMarketConditionsUsingtheelasticityofincomeformula,wecansolveforfEI=(I/Q)(Q/I)1.3=(1.0/7.5)(f)f=9.75Substitutingbackintodemandequationgivesa=3.75©2005PearsonEducation,Inc.86Chapter2PredictingtheEffectsofChanDecliningDemandandtheBehaviorofCopperPricesCopperhasgonethroughdifficultmarketchangesleadingthesignificantlyreducedpricesmostfromdecreaseddemandfromAdecreaseinthegrowthrateofpowergenerationThedevelopmentofsubstitutes:fiberopticsandaluminum©2005PearsonEducation,Inc.87Chapter2DecliningDemandandtheBehavRealversusNominal

PricesofCopper1965-2002©2005PearsonEducation,Inc.88Chapter2RealversusNominal

PricesofDecliningDemandandtheBehaviorofCopperPricesGivenproducers’concernsaboutfurtherdeclinesindemand,wecancalculatebyhowmuchpriceswillfallwithfuturedeclinesindemandAssumethatdemandwillfallby20%Whatistheresultingdecreaseinprice?Demandcurvewillshifttoleftby20%©2005PearsonEducation,Inc.89Chapter2DecliningDemandandtheBehavDecliningDemandandtheBehaviorofCopperPricesWewanttoconsider80%ofthepastdemand Q=(0.80)(13.5-8P)Q=10.8-6.4PRecalltheequationforsupply:Q=-4.5+16P©2005PearsonEducation,Inc.90Chapter2DecliningDemandandtheBehavDecliningDemandandtheBehaviorofCopperPricesSettingsupplyequaltodemand:-4.5+16P=10.8-6.4P-16P+6.4P=10.8+4.5P=15.3/22.4P=68.3cents/poundAdeclineindemandof20%willleadtoadropinpriceabout7%©2005PearsonEducation,Inc.91Chapter2DecliningDemandandtheBehavEffectsofPriceControlsMarketsarerarelyfreeofgovernmentinterventionImposedtaxesandgrantedsubsidiesPricecontrolsPricecontrolsusuallyholdthepriceaboveorbelowtheequilibriumpriceExcessdemand–shortageExcesssupply–surplus©2005PearsonEducation,Inc.92Chapter2EffectsofPriceControlsMarkeDEffectsofPriceControlsQuantityPriceP0Q0SPmaxPriceisregulatedtobenohigherthanPmaxQuantitysuppliedfallsandquantitydemandedincreasesAshortageresults

QSQDShortage©2005PearsonEducation,Inc.93Chapter2DEffectsofPriceControlsQuanEffectsofPriceControlsExcessdemandsometimestakestheformofqueuesLinesatgasstationsduring1974shortageSometimesgetcurtailmentsandsupplyrationingNaturalgasshortageofthemid’70’sProducerstypicallylose,butsomeconsumersgain.Someconsumerslose.©2005PearsonEducation,Inc.94Chapter2EffectsofPriceControlsExcesPriceControlsand

NaturalGasShortagesIn1954,thefederalgovernmentbeganregulatingthewellheadpriceofnaturalgasIn1962,theceilingpricesthatwereimposedbecamebindingandshortagesresulted©2005PearsonEducation,Inc.95Chapter2PriceControlsand

NaturalGasPriceControlsand

NaturalGasShortagesPricecontrolscreatedanexcessdemandof7trillioncubicfeetPriceregulationwasamajorcomponentofUSenergypolicyinthe1960sand1970s,anditcontinuedtoinfluencethenaturalgasmarketsinthe1980s©2005PearsonEducation,Inc.96Chapter2PriceControlsand

NaturalGasChapter2TheBasicsofSupplyandDemand©2005PearsonEducation,Inc.97Chapter2Chapter2TheBasicsofSupply©IntroductionWhataresupplyanddemand?Whatisthemarketmechanism?Whataretheeffectsofchangesinmarketequilibrium?Whatareelasticities