GLS1e Chapter2

Supply and
Demand
Chapter Outline
2.1 Markets and Models
2.2 Demand
2.3 Supply
2.4 Market Equilibrium
2.5 Elasticity
2.6 Conclusion
Copyright 2013 Worth Publishers, All Rights Reserved Microeconomics Goolsbee/Levitt/ Syverson 1/e
2-1
Introduction
In this chapter, we introduce the supply and

demand model. We will:
Describe the basics of supply and demand
Use equations and graphs to represent
supply and demand
Analyze markets for goods and services
using the supply and demand model
2-2
2.1 Markets and

Models
What is a market?
A market is characterized by a specific
Product or service being bought and sold
Location
Point in time
Markets facilitate exchange, including economic
resources and final goods and services
2-3
2.1 Markets and

Models
What are the supply and demand for a good?

Supply: The combined amount of a good that all producers in
a market are willing to sell
Demand: The combined amount of a good that all consumers
are willing to buy
2-4
2.2 Demand
What factors influence the demand for a

good or service?
Price
Number of consumers
Consumer wealth
Consumer tastes
Prices of other, related goods
Compliments and substitutes

2-5
2.2 Demand
Many factors influence demand for goods and

services is there one factor that stands out?
Focus on how the price of a good influences the
quantity demanded by consumers
Demand curve describes relationship between
quantity demanded and price, holding all other
factors constant
2-6
2.2 Demand
Figure 2.1 Demand for Tomatoes
2-7
2.2 Demand
Consider the market for oranges. We want to map out the

quantity (in pounds) demanded by local consumers at various
prices ($/pound)
Price of oranges
(dollars/pound)
At $6, consumers demand no

oranges; this is known as the
demand choke price
6
5
As the price drops, consumers

demand a greater quantity of
oranges
4
3
We draw a demand curve that

connects all the observed pricequantity combinations
2
1
400
800 1,20 1,60 2,00 2,40

0
0
0
0
REMEMBER TO ALWAYS LABEL

GRAPHS!
Quantity of
oranges
(pounds)
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Reserved Microeconomics Goolsbee/Levitt/ Syverson 1/e
2-8
2.2 Demand
We can also describe the demand curve

mathematically
The demand curve on the previous slide is given as
QD = 2,400 400P
where QD is the quantity of oranges demanded (in
pounds) and P is the price of oranges ($/pound)
It is common in economics to plot price on the
vertical axis.
Solving for price as a function of quantity demanded
yields the inverse demand curve
P = 6 0.0025QD
2-9
2.2 Demand
What about the other factors that influence

demand?
The demand curve is graphed in two dimensions; all
other factors are assumed constant
If another factor changes, the demand curve will shift
Change in quantity demanded a movement

along the demand curve in response to a price
change, with everything else held constant
Change in demand a shift of the entire demand
curve caused by a change in a non-price factor that
affects demand
2-10
2.2 Demand
Figure 2.2 Shifts in the Demand Curve
2-11
Application
Mad Cow disease and beef

Bovine spongiform encephalopathy (Mad Cow
Disease), is a potentially fatal disease contracted
through the consumption of infected beef products
Schlenker and Villas-Boas (2009) investigate the
impact of the announcement of the first confirmed
case of MCD in the US (December 23, 2003) on
daily beef sales for a national supermarket chain
Image: FreeDigitalPhotos.net
The authors find a significant drop in the quantity

of beef purchased following the announcement:
approximately 21% less beef was purchased in the
following 35 days
How do we represent this shock using demand
Citation:
Wolfram Schlenker and Sofia B. Vilas-Boas. 2009. Consumer and Market Responses to Mad Cow
curves?
Disease.
American Journal of Agricultural Economics 91(4):11401152.
2-12
Application
Prior to discovery, consumers demand five millions pounds of beef

per day at $3 per pound (numbers are examples)
Price of beef
($/pound)
Post-discovery, health concerns cause demand to shift inward,

reducing quantity demanded at $3 by one million pounds per day
3
Demand curve
after
announcement of
MCD curve
Demand
prior to
announcement of
MCD
0
Quantity of beef
per day (millions of
pounds)
2-13
2.2 Demand
Why do we treat price differently?

1.Price is usually the most important factor influencing
demand
2.Prices in most markets can change easily and often
3.Price is the one factor of demand most likely to
measurably impact the supply of a good, and therefore
ties together the two sides of the model
Now to the supply side of the model
2-14
2.3 Supply
What factors influence the supply of a good

or service?
Price
Number of sellers
Production costs (related to production
technology)
Sellers outside options
2-15
2.3 Supply
Figure 2.4 Supply of Tomatoes
2-16
2.3 Supply
We can describe the relationship between the quantity of

oranges supplied (in pounds) and the price ($/pound) with
a supply
Price
of oranges curve
(dollars/pound)
At prices below $2 per pound, suppliers find

it unprofitable to sell any oranges; this is
known as the supply choke price
6
5
As the price increases beyond $2, suppliers

will provide oranges to the market
Just as with demand, we connect the

observed price-quantity combinations using
a supply curve
3
2
1
400
800 1,20 1,60

0
0
Quantity of
oranges
Copyright 2013 Worth Publishers,
All Rights Reserved Microeconomics Goolsbee/Levitt/ Syverson 1/e
(pounds)
2-17
2.3 Supply
We can also describe the supply curve

mathematically
The supply curve on the previous slide is given as
QS = 400P 800
where QS is the quantity of oranges supplied (in
pounds) and P is the price of oranges ($/pound)
Since we plot price on the vertical axis, the inverse
supply curve is given as
P = 2 + 0.0025QS
2-18
2.3 Supply
When a factor affecting supply other than price

changes, the result is a shift in the supply curve
Change in quantity supplied a movement along
the supply curve in response to a price change, with
everything else held constant
Change in supply a shift of the entire supply
curve caused by a change in a non-price factor that
affects supply
2-19
2.3 Supply
Figure 2.5 Shifts in the Supply Curve
2-20
Application
Solar panels and polysilicon

Solar energy is often touted as a key ingredient in
the future of energy, but has historically been
cost-prohibitive
Recently, prices for solar modules have fallen
rapidly, pushing the cost of solar power closer to
grid parity
Grid parity means solar can compete with other sources
of energy on a cost basis
One of the key reasons has to do with the cost of

productionthe price of polysilicon, a
semiconductor that is the basis for most solar
systems, dropped more than 90% between 2008
and 2011
Citation: Roca, M and B. Sills. November 10, 2011. Solar Glut Worsens as Supply Surge Cuts Prices 93%:
Commodities. Bloomberg News, www.bloomberg.com
How can we describe this phenomenon using
2-21
Application
Price of
solar
capacity
($/watt)
Supply curve in
2008
In 2008, the cost of solar

installation averaged $3 per watt;
producers were willing to supply
10 megawatts (MW) (numbers are
examples)
As suppliers of polysilicon expand
capacity, the cost of this key input
drops, shifting the supply of solar
energy out
Supply curve in
2011
1
0
Producers are willing to supply 30

MW in 2011 at a price of $3 per
watt
3
0
New solar
capacity
(megawatts)
2-22
2.4 Market
Equilibrium
Combining the descriptions of market supply and

market demand completes the model
Remember, supply and demand curves relate the price
of a good to the quantity demanded or supplied
The point at which these two curves cross is called

the market equilibrium
Market equilibrium occurs when the price of a good
results in the quantity demanded equal to the quantity
supplied
Equilibrium price the only price at which the quantity
demanded equals the quantity supplied
2-23
2.4 Market
Equilibrium
The market equilibrium can be identified mathematically.

For the orange example:
QD = 2,400 400P
QS = 400P 800
At equilibrium, Qe = QD = QS (Qe is equilibrium quantity);

we solve for equilibrium price, Pe, by setting supply equal
to demand
2,400 400Pe = Qe = 400Pe 800

Combining terms containing Pe yields
800Pe = 3200 , Pe = 4
To find Qe, substitute Pe = 4 into either equation, yielding
Q = 800 Copyright 2013 Worth Publishers, All Rights Reserved Microeconomics Goolsbee/Levitt/ Syverson 1/e
2-24
2.4 Market
Equilibrium
Graphically, equilibrium can be found by plotting

supply and demand together
Price of oranges
(dollars/pound)
Demand and supply intersect at

price of $4.00 per pound of
oranges, resulting in 800 pounds
of oranges being sold
6
5
This is the only price that can

clear the market
Higher prices: quantity supplied

exceeds quantity demanded
Lower prices: quantity demanded
exceeds quantity supplied
3
2
1
D
0
400 800 1,20 1,60 2,00 2,40

0
0
0
0
Quantity of
oranges
(pounds)
2-25
2.4 Market
Equilibrium
How do markets move toward equilibrium? First, if P

> Pe, quantity supplied will exceed quantity
demanded
Excess supply is referred to as surplus
To sell their products, producers must lower prices
As prices fall, quantity demanded increases and quantity
supplied decreases until the market reaches equilibrium
at a lower price
2-26
2.4 Market
Equilibrium
Describing a surplus graphically
Price of oranges
(dollars/pound)
6
At a price of $5, 1,200 pounds are

supplied, but only 400 are demanded
Surplu
s
There is a surplus of 800 pounds

To reach equilibrium, prices must fall,
leading to a decrease in the quantity
supplied, and an increase in the
quantity demanded
5
4
3
2
1
D
0
400 800 1,20 1,60 2,00 2,40

0
0
0
0
Quantity of
oranges
(pounds)
2-27
2.4 Market
Equilibrium
Likewise, if P < Pe, quantity demanded will exceed

quantity supplied
Excess demand is referred to as shortage
The shortage will induce buyers to bid up the price
As prices rise, quantity demanded will fall and quantity
supplied will rise until the market reaches equilibrium at a
higher price
2-28
2.4 Market
Equilibrium
Describing a shortage graphically
Price of oranges
(dollars/pound)
At a price of $3, 400 pounds are

supplied, but 1,200 pounds are
demanded
There is a shortage of 800 pounds
To reach equilibrium, prices must rise,

leading to a decrease in the quantity
demanded, and an increase in the
quantity supplied
4
3
2
1
Shortag
e
D
0
400 800 1,20 1,60 2,00 2,40

0
0
0
0
Quantity of
oranges
(pounds)
2-29
The Demand for Gym Memberships
Figure it out
The supply and demand for monthly gym

memberships are given as
QS = 10P 300 , QD = 600 10P

Where P is the monthly price, in dollars
Answer the following questions:
1.If the current price for memberships is $50 per
month, is the market in equilibrium?
2.Would you expect the price to rise, or fall?
3.If so, by how much?
2-30
Figure it out
1. Two ways to solve the problem
Compute quantity supplied and demanded at a price of

$50, or
Solve for the equilibrium price, and compare with $50
Using the first method
QS = 10P 300 = 10(50) 300 = 200

QD = 600 10P = 600 10(50) = 100
QS > QD, and the market is not in equilibrium.
2. What must happen to price?
Price needs to fall but by how much?
3. Solve for equilibrium price and quantity
QS = QD = Q* => 10P* 300 = 600 10P* => P* =

$45, Q* = 150
2-31
Market
2.4Equilibrium
What happens to the market equilibrium when there

is a shift in demand or supply?
Remember the factors that can shift the demand curve
Number of consumers
Wealth or income
Consumer tastes
Prices of related goods (complements or substitutes)
and the supply curve

Number of producers
Costs of production
Producer outside options
2-32
Market
2.4Equilibrium
Figure 2.7 Why Pe Is the Equilibrium Price
2-33
Market
2.4Equilibrium
In January, 2012, the FDA announced it had detected

low levels of carbendazim, a potentially dangerous
fungicide, in samples of orange juice
How will this announcement affect the market for
oranges?
Supply side the levels detected were not sufficient to
induce action by FDA; assume no impact on supply
Demand side bad press can have negative impacts on
demand for food products what should happen?
2-34
Market
2.4Equilibrium
We can describe this graphically

Price of oranges
(dollars/pound)
Prior to the FDAs discovery, 800 pounds

of oranges are sold at $4 per pound
After the announcement, demand shifts

from D1 to D2
6
5
The new equilibrium occurs when 400

pounds are sold at a price of $3 per
pound
4
3
2
1
D2
0
D1
There has been a decrease in demand

and a decrease in the quantity of
oranges supplied in response to a
falling price
400 800 1,20 1,60 2,00 2,40

0
0
0
0
Quantity of
oranges
(pounds)
2-35
A Shift in Demand
Figure it out
Draw a supply and demand diagram of the market for

generators in Tampa, Florida
1.Suppose a hurricane watch is issued, and some
residents expect to lose power. Using the supply and
demand diagram, show what will happen to the
equilibrium price and quantity in the Tampa market for
generators
2.Does this change reflect a change in demand or a
change in the quantity demanded?
2-36
Figure it out
A Shift in Demand
The initial equilibrium

occurs at a price of P1 and
quantity Q1
Price of
generators
(dollars)
When the hurricane watch

is issued, demand shifts
outward
The new price is P2, and the
new quantity is Q2
P2
So, price and quantity

exchanged have both
increased
P1
D2
D1
Q1
Q2
This represents a change

(or shift) in demand
Quantity of
generators
2-37
Market
2.4Equilibrium
In February, 2011, Brazil won a trade dispute with the

U.S. regarding imported orange juice, finding the U.S. was
unfairly excluding Brazilian suppliers from U.S. markets
by use of a tariff
The result was more orange juice imported from Brazil
How should this announcement affect the market for
oranges?
Demand side this should not affect demand
Supply side the ruling applies to orange juice, not
oranges what is the difference?
If applied to oranges, more sellers supply shifts out

As it applies only to juice, affects outside
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orange Goolsbee/Levitt/
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2-38
Market
2.4Equilibrium
We can describe this graphically

Price of oranges
(dollars/pound)
S2
S1
When the tariff is repealed, domestic

orange producers shift product from juice
processors to fruit markets, supply shifts
from S1 to S2
6
5
4
New equilibrium: 1,200 pounds at $3 per

pound
3
2
1
D
0
With the tariff, 800 pounds of oranges are

sold at $4 per pound
400
There has been an increase in supply and

an increase in the quantity of oranges
demanded in response to a lower price
800 1,20 1,60 2,00 2,40

0
0
0
0
Quantity of
oranges
(pounds)
2-39
A Shift in Supply
Figure it out
This summer, you noticed the price of lobster in your

supermarket rising, but also that there was much
more lobster being sold
Using a supply and demand diagram, what can you
infer about this market?
2-40
Figure it out
A Shift in Supply
The initial equilibrium

occurs at a price of P1 and
quantity Q1
Price of
generators
(dollars)
What change in supply or

demand would result in
prices rising and quantity
exchanged falling?
A negative shift in supply!

The new price is P2, and the
new quantity is Q2
P2
P1
D
Q2 Q1
This represents a change

(or shift) in supply and a
change in the quantity
demanded
Quantity of
generators
2-41
Figure it out
Going back to the previous example of gym

memberships
QS = 10P 300 , QD = 600 10P

Now, suppose the town opens a new community
center with a pool and a weight room. As a result,
consumers demand 200 fewer gym memberships at
every price
1.Write down the new demand equation
2.What do you expect to happen to the equilibrium
price and quantity (remember, previously P* = $45,
Q* = 150)?
3.Compute the new equilibrium price and quantity.
2-42
Figure it out
2-43
Market
2.4Equilibrium
Summary of the effect of a shift in supply or demand

on market equilibrium
2-44
Market
2.4Equilibrium
What determines the magnitude of the change in

equilibrium price and quantity?
Two important parameters
Size of the shift
Slope of the curves
If demand shifts, the slope of the supply curve

determines size of changes to equilibrium price and
quantity, and vice versa
The size of the change in price is inversely related to the
size of the change in quantity
2-45
Market
2.4Equilibrium
Consider an outward shift in supply (increase)

Pric
e
S1
Demand has relatively steep slope:

shift in supply results in large change in
price and small change in quantity
exchanged
S2
P
P
Demand has relatively shallow slope:

the same shift in supply results in small
change in price and large change in
quantity exchanged
D
0
Q
Q
Quantity
2-46
Market
2.4Equilibrium
Figure 2.11 Size of Equilibrium Price and Quantity Changes, and

the Slopes of the Supply and Demand Curves
2-47
Market
2.4Equilibrium
Sometimes, supply and demand shift simultaneously

Hurricane Katrina and the New Orleans
housing market
Katrina destroyed many homes what happens to
supply?
The hurricane displaced thousands of residents, many
have not returned what happens to demand?
How will these shifts affect the housing market
equilibrium in New Orleans?
2-48
Market
2.4Equilibrium
Hurricane Katrina and the New Orleans housing

market
Price
S1
S2
The hurricane shifts supply and

demand inward. The result is a large
drop in quantity, and a small drop in
price
P
P
However, without specific information

on shifts and slopes of supply and
demand, we cannot know for sure
what happens to price
D2
0
Q
Q
D2
D1
Example: Consider smaller demand

shift; quantity still falls, but price has
risen slightly!
Quantity
2-49
2.5 Elasticity
The slopes of the supply and demand curves

determine how markets respond to shifts in supply
and demand
Steep curves: large changes in price and small changes in
quantity, all else equal
Shallow curves: small changes in price and large changes in
quantity, all else equal
2-50
2.5 Elasticity
Elasticity
Unit-less measure that describes the sensitivity of
quantity demanded or supplied
Percentage change in one variable (e.g., quantity)
divided by the percentage change in another (e.g., price)
2-51
2.5 Elasticity
Price elasticity of demand: percentage change in

quantity demanded divided by percent change in
D
price
%Q
E
%P
D
Price elasticity of supply: percentage change in

quantity supplied divided by percent
change in price
S
%Q
E
%P
S
2-52
2.5 Elasticity
When price elasticity of demand is high

Relatively small increases in price result in relatively large
drops in quantity demanded
Examples?
McDonalds hamburgers
When price elasticity of demand is low

Relatively large increases in price result in relatively small
drops in quantity demanded
Examples?
Gasoline
2-53
2.5 Elasticity
What variables affect the elasticity of demand?

The availability of close substitutes
Breadth of the market
Type of product (e.g., necessity or luxury item)
Percentage of income spent on the good
Time horizon of the analysis
What variables affect the elasticity of supply?

The ease at which production capacity can be
expanded
Time horizon of the analysis
2-54
2.5 Elasticity
Terminology
Elastic: Demand is elastic if |ED| > 1
Unit elastic: Demand is unit elastic if |ED| = 1
Inelastic: Demand is inelastic if 0 < |ED| < 1
Perfectly elastic: Demand is perfectly elastic if |ED| =
Perfectly inelastic: Demand is perfectly inelastic if |ED|

=0
Important: Elasticities do not have units attached;

can be compared across different goods and services
in different markets, and also used to describe
supply Copyright 2013 Worth Publishers, All Rights Reserved Microeconomics Goolsbee/Levitt/ Syverson 1/e
2-55
Application
The price of gas and traffic congestion

Burger and Kaffine (2009) investigate gas prices,
highway speed, and congestion in Los Angeles between
2001 and 2006
In theory, higher gasoline prices should reduce highway
speeds because driving slowly tends to increase
efficiency
The authors find drivers do not slow down when traffic is

light; however, during rush hour, average speeds actually
increase (about 3.3 miles per hour for every
$1.00/gallon)
They attribute this to reduced congestion; drivers
respond to high prices by taking fewer trips, or using
public transportation
Accounting for the relationship between vehicle miles
travelled (VMT) and congestion, the authors estimate the
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Publishers,
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price elasticityCopyright
of demand
VMT
to be
approximately
Citation: Burger, N.E. and D.T. Kaffine. 2009. Gas Prices, Traffic, and Freeway Speeds in Los
Angeles. The Review of Economics and Statistics 91(3): 652-657
2-56
2.5 Elasticity
Elasticities and linear demand and supply
We often assume demand and supply are linear, so knowing

how to calculate elasticity on a linear curve is important
Equation for price elasticity (demand or supply)
%Q
E
%P
or,
E
Q / Q
P / P
Moving up or down a linear supply or demand curve, the ratio

Q/P is equal to 1/slope
Q / Q Q P
1
P
E
P / P P Q slope Q
2-57
2.5 Elasticity
Price elasticity of demand for a linear demand curve

Price of oranges
(dollars/pound)
6
5
4
3
At the top of our demand curve,

1
P
6
ED
D 400 (perfectly elastic)
slope Q
0
4
E D 400
2
(elastic)
800
3
E D 400
1
1, 200
(unit elastic)
E D 400
2
0.5
1, 600
E D 400
0
0
2, 400
2
1
(inelastic)
(perfectly
inelastic)
800 1,20 1,60 2,00 2,40 Quantity of
0
0
0
0
oranges
Copyright 2013 Worth Publishers, All Rights Reserved (pounds)
Microeconomics Goolsbee/Levitt/ Syverson 1/e
400
2-58
2.5 Elasticity
As you move down a demand curve, demand becomes

less elastic, eventually perfectly inelastic at the horizontal
axis
D
Q
P
D
E
D
P Q
Slope is constant along

the demand curve
P/Q falls as you move down the

demand curve
2-59
2.5
Elasticity
Price elasticity of supply for a linear supply curve

Price of oranges
(dollars/pound)
E S 400
E S 400
6
5
(elastic)
4
2
800
E S 400
(elastic)
5
1.67
1, 200
E S 400
(elastic)
3
3
400
(elastic)
At the bottom of the supply curve,
ES
6
1.5
1, 600
400
1
P
2
S 400
slope Q
0
(perfectly elastic)
800 1,20 1,60

0
0
Quantity of
oranges
All Rights Reserved Microeconomics Goolsbee/Levitt/ Syverson 1/e
(pounds)
2-60
The Elasticity of Demand for Movie Tickets
Figure it out
The demand for movie tickets in a small town is given

as
QD = 1,000 50P
1.Calculate the price elasticity of demand when the
price of tickets is $5
2.Calculate the price elasticity of demand when the
price of tickets is $12
3.At what price is the price elasticity of demand unit
elastic?
4.What happens to the price elasticity of demand as
you move down a linear demand curve?
2-61
Figure it out
1. The price elasticity of demand is given as

Q D / Q D Q D P
D
E
D
P / P
P Q
QD
50
At $5,
P
At a price of $5,
Therefore,
is constant (linear demand curve)

P
5
1
Q D 1000 50 (5) 150
Q D P
1
E
D 50
0.33333
P Q
150
D
And, demand is
Inelastic
2-62
Figure it out
P
12
3
Q D 1, 000 50 (12) 100

D
Q
P
3
ED
D 50
1.5
P Q
100
2-63
Figure it out
3. At what price is demand unit elastic?

(Unit elastic implies ED = 1)
To solve for the correct price, use the equation for

elasticity of demand
P
1 50
1, 000 50 P
Multiply both sides by 1,000 50P
50 P 1, 000 50 P
And combine terms, yielding a price of P = $10
4. What happens to the elasticity of demand as you
move down a linear demand curve?
Demand becomes less elastic

2-64
2.5 Elasticity
Perfectly inelastic demand and supply

Implies quantity demanded/supplied does not change in
response to a change in price
Example: life-saving drugs (near-perfectly inelastic
demand)
Perfectly elastic demand and supply

Implies the quantity demanded/supplied is infinitely
responsive to miniscule changes in price
Example: Commodity crops (near-perfectly elastic demand)
2-65
2.5 Elasticity
Price
1
P
E
slope Q
When is demand/supply perfectly

inelastic (E = 0)?
When P = 0 (horizontal axis)
1 P
0
Q
1 P
E
0 Q
0
When the slope of demand/supply is

infinite
When is demand/supply perfectly

elastic
(E = )?
When Q = 0 (vertical axis)
When the slope of demand/supply is
zero
Quanti
ty
2-66
2.5Elasticity
Demand elasticity affects consumer expenditures for

products
Revenue = P Q
ED is the ratio of the percentage change in quantity
demanded to the percentage change in price.
If demand is inelastic, a 1% increase in price reduces demand
by less than 1%... total expenditures rise
If demand is elastic, a 1% increase in price reduces demand by
more than 1%... total expenditures fall
This information can be useful for producers who are able to
manipulate market supply (more on this in Chapter 9)
2-67
2.5Elasticity
Price of oranges
(dollars/pound)
6
Total expenditures = total revenue = P Q
Unit elastic
3,600
3,200
5
4
2,000
3
2
1
400
800 1,20 1,60 2,00 2,40 Quantity of 0

0
oranges
0
0
0
(pounds)
400
800 1,20 1,60 2,00 2,40 Quantity of

oranges
0
0
0
0
(pounds)
2-68
2.5
Elasticity
%Q
Q / Q
E
%I
I / I
D
I
2-69
2.5
Elasticity
Figure 2.19 Expenditures along a Linear Demand

Curve
2-70
2.5
Elasticity
D
EXY
%QXD QXD / QXD
%PY
PY / PY
2-71
Application
Citation: Gallet, C.A. and J.A. List. 1998. Elasticities of Beer Demand Revisited. Economics Letters
61: 67-71
2-72
Application
What might explain changes in elasticities over time?

Consumer tastes: release of information regarding
negative health effects beginning in the 1970s may
have led to reduced demand
Increased proportion of drinkers who are less health
conscious and/or addictive in nature
Evidence suggests heavy drinkers are less pricesensitive to alcohol, hence the change to inelastic
Poorer consumers are generally have less education
and are less health conscious, hence the move to an
inferior good
Change in beer-wine relationship from substitutes to

unrelated goods perhaps due to increased product
differentiation (e.g., microbreweries, lite beers) in the
beer industry
Citation: Gallet, C.A. and J.A. List. 1998. Elasticities of Beer Demand Revisited. Economics Letters
61: 67-71
2-73
2.6
Conclusion
2-74

GLS1e Chapter2

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GLS1e Chapter2

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Supply and

In this chapter, we introduce the supply and

2.1 Markets and

2.1 Markets and

What are the supply and demand for a good?

What factors influence the demand for a

Compliments and substitutes

Many factors influence demand for goods and

Figure 2.1 Demand for Tomatoes

Consider the market for oranges. We want to map out the

At $6, consumers demand no

As the price drops, consumers

We draw a demand curve that

800 1,20 1,60 2,00 2,40

REMEMBER TO ALWAYS LABEL

We can also describe the demand curve

What about the other factors that influence

Change in quantity demanded a movement

Figure 2.2 Shifts in the Demand Curve

Mad Cow disease and beef

The authors find a significant drop in the quantity

Prior to discovery, consumers demand five millions pounds of beef

Post-discovery, health concerns cause demand to shift inward,

Why do we treat price differently?

Now to the supply side of the model

What factors influence the supply of a good

Figure 2.4 Supply of Tomatoes

We can describe the relationship between the quantity of

At prices below $2 per pound, suppliers find

As the price increases beyond $2, suppliers

Just as with demand, we connect the

800 1,20 1,60

We can also describe the supply curve

When a factor affecting supply other than price

Figure 2.5 Shifts in the Supply Curve

Solar panels and polysilicon

One of the key reasons has to do with the cost of

How can we describe this phenomenon using

In 2008, the cost of solar

Producers are willing to supply 30

Combining the descriptions of market supply and

The point at which these two curves cross is called

The market equilibrium can be identified mathematically.

At equilibrium, Qe = QD = QS (Qe is equilibrium quantity);

2,400 400Pe = Qe = 400Pe 800

Graphically, equilibrium can be found by plotting

Demand and supply intersect at

This is the only price that can

Higher prices: quantity supplied

400 800 1,20 1,60 2,00 2,40

How do markets move toward equilibrium? First, if P

At a price of $5, 1,200 pounds are

There is a surplus of 800 pounds

400 800 1,20 1,60 2,00 2,40

Likewise, if P < Pe, quantity demanded will exceed

At a price of $3, 400 pounds are

There is a shortage of 800 pounds

To reach equilibrium, prices must rise,

400 800 1,20 1,60 2,00 2,40

The Demand for Gym Memberships

The supply and demand for monthly gym

QS = 10P 300 , QD = 600 10P

The Demand for Gym Memberships