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Economics - Demand, Supply, and Elasticity

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Study GuideEconomics–Demand, Supply, and Elasticity1. Equilibrium Analysis1.1What Is Market Equilibrium?In any market for a good (let’s call itgood X), buyers and sellers interact at the same time.•Buyersdecide how much they want to buy (demand).•Sellersdecide how much they want to sell (supply).The market is said to be inequilibriumwhen:•Quantity demanded = Quantity suppliedAt this point:•Theequilibrium priceis the price at which the market clears (no shortage or surplus).•Theequilibrium quantityis the amount bought and sold at that price.There aretwo main waysto find equilibrium:1.Algebraic method(using equations)2.Graphical method(using demand and supply curves)

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Study Guide1.2 Algebraic Approach to EquilibriumStep 1: Write Demand and Supply Equations•Demand equation:•P = 10-2Q•Supply equation:•P =(1/2)QTo make solving easier, rewrite the supply equation in terms ofQ:Q = 2PStep 2: Solve the Equations TogetherP=10−2(2P)P=10−4P5P=10,P=2Equilibrium Price = $2

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Study GuideStep 3: Find Equilibrium QuantitySubstitute ( P = 2 ) into the supply equation:Q = 2(2)Q= 4Equilibrium Quantity = 4 units of good X1.3 Graphical Approach to EquilibriumIn the graph:•Thedownward-sloping lineis thedemand curve•Theupward-sloping lineis thesupply curve•Theintersection pointshows equilibriumFrom the graph:•Equilibrium Price = $2•Equilibrium Quantity = 4 unitsThis matches the answer from the algebraic method.1.4Changes in EquilibriumEquilibrium stays the sameonly if demand and supply do not change.If either curve shifts, the equilibrium price and quantity will change.

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Study Guide(a) Changes Due to Demand•Demand shifts left (Dₐ → Dᵦ):oEquilibriumprice fallsoEquilibriumquantity falls•Demand shifts right (Dₐ → D𝒸):oEquilibriumprice risesoEquilibriumquantity rises✔Supply is assumed constant(b) Changes Due to Supply•Supply shifts left (Sₐ → Sᵦ):oEquilibriumprice risesoEquilibriumquantity falls•Supply shifts right (Sₐ → S𝒸):oEquilibriumprice fallsoEquilibriumquantity rises✔Demand is assumed constant

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Study Guide2. ElasticitySo far, we have learned howequilibrium price and quantityare determined by demand and supply.Now, we go one step further.Economists also want to knowhow strongly buyers and sellers reactwhen prices or incomeschange.This responsiveness is calledelasticity.In simple words,elasticity measures how much quantity changes when something elsechanges, such as price or income.2.1 Price Elasticity of DemandPrice elasticity of demandtells ushow much quantity demanded changes when price changes.FormulaPrice Elasticity of Demand= Percentage change in quantity demanded ÷ Percentage change in priceThis formula compares:•Percentage change inquantity demanded•Percentage change inprice2.2Elastic vs Inelastic Demand•Price elastic demandoQuantity demanded changesmorethan priceoConsumers react strongly to price changes•Price inelastic demandoQuantity demanded changeslessthan priceoConsumers are not very sensitive to price changes

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Study Guide2.3Real-Life ExampleImagine a50% increase in priceof:•Candy bars•Prescription medicinesPeople will reduce buyingboth, but:•Candy bars are not necessities → demand falls a lot•Medicines are necessary → demand falls only a littleSo:•Demand forcandy bars is more elastic•Demand forprescription medicines is more inelastic2.4Price Elasticity of SupplyPrice elasticity of supplymeasureshow much quantity supplied changes when price changes.FormulaPrice Elasticity of Supply= Percentage change in quantity supplied ÷ Percentage change in price2.5Elastic vs Inelastic Supply•Price elastic supplyoQuantity supplied changesmorethan price•Price inelastic supplyoQuantity supplied changeslessthan price
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Document Details

University
Texas A&M University
Course
Economics
Subject
Economics

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