ECON2913 (Spring 2012)
14 & 17.2.2012 (Tutorial 1)
Chapter 2 The Basics of Supply and Demand
Demand: Q = a – bP
Supply: Q = c + dP
Elasticity: Ep = (%Q) / (%P) = (Q/Q) / (P/P) = (P/Q) (Q/P)
Example: The global market for wheat (P.37)
Given
Supply: QS = 1800 + 240P
Demand: QD = 3550 – 266P
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What is the equilibrium price and quantity for wheat? What are the elasticity of demand
and the elasticity of supply in the equilibrium?
In the market equilibrium,
QS = QD
1800 + 240P = 3550 – 266P
P* = 3.46 and Q* = 2630
EDP = (%Q) / (%P) = (P/Q) (Q/P) = (3.46/ 2630) (– 266) = 0.35
ESP = (%Q) / (%P) = (P/Q) (Q/P) = (3.46/ 2630) (240) = 0.32
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Does the elasticity of demand/ supply vary as we move along the demand/ supply curves?
(linear demand function and price elasticity of demand)
Example: Market for the world copper (P.49)
Given the market equilibrium: P* = $0.75, Q* = 7.5million
Elasticity of supply: ES = 1.6 and Elasticity of demand: ED = 0.8
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What are the equations for the demand and supply curves? (Hint: what is the slope and
intercept of the demand and supply equations?)
Let the demand functions be QD = a – bP
EDP = (P/Q) (Q/P) = (0.75/7.5) ( b) = 0.8  b = 8
7.5 = a + 8(0.75)  a = 13.5
Demand: Q = 13.5 – 8P
Let the supply functions be QS = c + dP
ESP = (P/Q) (Q/P) = (0.75/7.5) (d) = 1.6  d = 16
7.5 = c + 16(0.75)  c = 4.5
Supply: Q = 4.5 + 16P
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Suppose demand also depends on income. Income in base year is 1 and the income
elasticity of demand is 1.3. What is the equation for the demand curve?
The demand function becomes QD = a – bP + eI
EDI = (I/Q) (Q/I) = (1/7.5) (e) = 1.3  e = 9.75
7.5 = a – 8(0.75) + 9.75(1)  a = 3.75
Demand: Q = 3.75 – 8P + 9.75I
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Chapter 3 Consumer Behavior
Consumer choice and Utility maximization
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subject to
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Utility maximization is achieved when MRS is equal to the ratio of the prices
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Equal marginal principle: utility is maximized when the consumer has equalized the
marginal utility per dollar of expenditure across all goods
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Marginal Utility (MU): additional satisfaction obtained from consuming one additional
unit of a good.
Diminishing marginal utility: as more of a good is consumed, the consumption of
additional amounts will yield a smaller additions to utility
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Consider a small downward movement along the indifference curve,
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Utility is maximized when
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What is the interpretation of the equal marginal principle?
What if the equal marginal principle is not hold?
Is this condition hold in the corner solution?
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Example 3.7: Price control and Rationing (P.94)
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An individual’s income: $200000
Controlled price of gasoline: $1
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Would the consumer be better off/ worse off
if there is a limit of 2000 gallons available to
each consumer? What is the budget line
under rationing?
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Without gasoline rationing, the consumer chooses point C to maximize utility (U2)
With a limit of 2000 gallons under rationing (at point E), the consumer moves to D on
the lower IC (U1)
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Could the consumer be better off under rationing?
It depends on the competitive market price of gasoline without rationing
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The consumer is better off under rationing if the
competitive price is $2 (Point F)
The consumer is worse off if the competitive price is
$1.33 (Point G)
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