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DEMAND

DEMAND. The relationship between demand and price the law of demand the income effect the substitution effect The demand curve. DEMAND. Other determinants of demand tastes number and price of substitute goods number and price of complementary goods income distribution of income

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DEMAND

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  1. DEMAND • The relationship between demand and price • the law of demand • the income effect • the substitution effect • The demand curve

  2. DEMAND • Other determinants of demand • tastes • number and price of substitute goods • number and price of complementary goods • income • distribution of income • expectations • Movements along and shifts in the demand curve

  3. An increase in demand P Price D0 D1 O Q0 Q1 Quantity

  4. SUPPLY • The relationship between supply and price • The supply curve • why supply curves generally slope upwards • Other determinants of supply • costs of production • profitability of alternative products (substitutes in supply) • profitability of goods in joint supply • nature and other random shocks • aims of producers • expectations of producers • Number of producers

  5. Shifts in the supply curve P S2 S0 S1 Decrease Increase O Q

  6. The determination of market equilibrium(potatoes: monthly) e E Supply d D c C Price (pence per kg) b B a A Demand Quantity (tonnes: 000s)

  7. The determination of market equilibrium(potatoes: monthly) e E Supply d D c C Price (pence per kg) b SHORTAGE B (300 000) a A Demand Quantity (tonnes: 000s)

  8. The determination of market equilibrium(potatoes: monthly) e E Supply d D SURPLUS (330 000) c C Price (pence per kg) b B a A Demand Quantity (tonnes: 000s)

  9. The determination of market equilibrium(potatoes: monthly) e E Supply d D c C Pe Price (pence per kg) b B a A Demand Qe Quantity (tonnes: 000s)

  10. Effect of a shift in the demand curve P S i Pe2 g h Pe1 D2 D1 O Qe1 Qe2 Q

  11. Effect of a shift in the supply curve P S2 S1 k Pe3 j g Pe1 D O Qe3 Qe1 Q

  12. ELASTICITY • Elasticity • use of proportionate or percentage changes • the sign (positive or negative) • the value (greater or less than one) • Price elasticity of demand (PÎd): determinants • number and closeness of substitute goods • the proportion of income spent on the good • time

  13. ELASTICITY • Price elasticity of demand and consumer expenditure (P x Q) • effects of a price change on expenditure: elastic demand • effects of a price change on expenditure: inelastic demand • extreme cases • applications to price decisions

  14. ELASTICITY • Measurement of elasticity: arc elasticity • the formula for price elasticity of demand: Q/Q ÷ P/P • using the average or 'mid-point' method

  15. Measuring elasticity using the arc method DQ DP Ped = ¸ mid Q mid P m 10-2 15 7 ¸ = = 10/15 x -7/2 = -70/30 = -7/3 = -2.33 n P (£) Demand Q (000s)

  16. ELASTICITY • Measurement of elasticity: point elasticity • the formula for price elasticity of demand: dQ/dP x P/Q • the elasticity of a straight-line demand ‘curve’ (constant dQ/dP) • the elasticity of a curved demand curve: dQ/dP is the tangent to the curve

  17. Measuring elasticity at a point 50 Ped = (1 / slope) x P/Q = -100/50 x 30/40 = -60/40 = -1.5 r 30 P D 0 100 40 Q

  18. Supply in different time periods P Si SS b P2 c SL P3 d P4 P1 a D2 D1 O Q4 Q1 Q3 Q

  19. ELASTICITY • Income elasticity of demand • measurement • determinants • applications • Cross-price elasticity of demand • measurement • determinants • applications

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