Lecture 2
The Basics of Supply and Demand
Supply and Demand
The Supply Curve
Q_S=Q_S(P)
Higher Price → Larger Quantity (upward)
Lower Production costs → Larger Quantity (that is the right shift of the curve)
The Demand Curve
Q_D=Q_D(P)
 substitutes
 complements
Higher Price → Smaller Quantity (downward)
High income → Larger Quantity (that is the right shift of the curve)
The Market Mechanism
 equilibrium (or market clearing) price: Price that equates the quantity supplied to the quantity demanded.(
P_0
)  market mechanism: Tendency in a free market for price to change until the market clears.
 surplus Situation: in which the quantity supplied exceeds the quantity demanded.
 shortage Situation: in which the quantity demanded exceeds the quantity supplied.
This assumption makes sense only if a market is at least roughly competitive. Both sellers and buyers should have little market power (little ability individually to affect the market price)
Changes in Market Equilibrium
Elasticities of Supply and Demand
elasticity: Percentage change in one variable resulting from a 1percent increase in another.
 elastic: the change is great (
<1
)  inelastic: the change is minor (
>1
)
E_p=\dfrac{\%\Delta Q}{\%\Delta P} = \dfrac{\frac{\Delta Q}{Q}}{\frac{\Delta P}{P}}=\dfrac{P}{Q}\dfrac{\Delta Q}{\Delta P}
Talking about larger or smaller, we always talk about the absolute value.

Horizontal Demand Curve
Infinite elasticity 
Vertiacal Demand Curve
zero elasticity (inelastic)
income elasticity of demand
crossprice elasticity of demand
ShortRun versus LongRun Elasticities
Not by a calendar length. The distinctions here are vague.
Short run: fixed cost
Long run: no fixed cost
Demand
Demand  Price elasticities
 For necessities:
In the short run, necessities have smaller price elasticity of demand;
In the long run, necessities have larger price elasticity of demand.  For durables:
In the short run, durables have larger price elasticity of demand;
In the long run, durables have smaller price elasticity of demand;
Gasoline belongs to necessities, and automobiles are durables.
Supply
Secondary supply is therefore less elastic in the long run than in the short run.
Understanding and Predicting the Effects of Changing Market Conditions
A mathematical problem that is really a piece of cake.
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