Demand

1
Demand

• Demand - To be considered in demand for a good
  you must be able and willing to purchase the good
  in various quantities at various prices.
• The Law of Demand - Quantity demanded rises as
  price falls, ceteris paribus. Quantity demanded
  falls as price rises, ceteris paribus
• Demand curve - a curve relating how much a good
  is demanded at various prices.

2
Demand Factors

• Normal good - a good the demand for which rises
  as income rises.
• Inferior goods - a good the demand for which
  falls as income rises.
• Substitutes - two goods that satisfy similar
  needs or desires. If two goods are substitutes
  then as the price of one rises, demand for the
  other good will increase.
• Complements - two goods that are used jointly in
  consumption. If two goods are complements then
  as the price of one rises, demand for the other
  good will decrease.

3
Supply

• Supply -To be considered to supply a good you
  must be able and willing to produce (and sell)
  the good in various quantities at various prices.
• Law of Supply as the price of a good rises,
  producers will supply more of the good, ceteris
  paribus.
• Supply curve - a curve relating how much a good
  is supplied at various prices.

4
Demand and Supply Math

• P a bQ
• P c dQ
• a bQ c dQ
• (a-c) (bd)Q
• (a-c)/(bd) Q
• This is not real helpful. Just set the two
  equations equal to each and solve for
  equilibrium.

5
Controls on Price

• Price Ceiling - a government mandated maximum
  price above which legal trades cannot be made.
• Impact Creates a shortage of the good.
• Alternative rationing methods must be employed.
• Price floor - a government mandated minimum price
  below which legal trades cannot be made.
• Impact Creates a surplus of the good.

6
Consumer Surplus

• Willingness to Pay the maximum amount that a
  buyer will pay for a good.
• Consumer Surplus a buyers willingness to pay
  minus the amount the buyer actually pays.
• Use the demand curve to measure consumer surplus.
• NOTE Consumer surplus measures the benefits that
  buyers receive from a good as the buyer
  themselves perceive it.

7
Producer Surplus

• Cost the value of everything a seller must give
  up to produce a good.
• Producer Surplus the amount a seller is paid
  for a good minus the sellers cost.
• Using the supply curve to measure producer
  surplus.

8
TAXES

• Tax Incidence the study of who bears the burden
  of taxation
• A Tax on Buyers or Sellers
• A tax on buyers will shift the demand curve
  downward by the size of the tax.
• A tax on sellers will shift the supply curve
  upward by the size of the tax.
• Lessons
• Taxes reduce output in the market
• Buyers and sellers share the burden of the tax
• The decision to tax depends upon a comparison of
  the cost of taxation with the benefits of
  government spending.

9
The Deadweight Loss of Taxation

• The tax may shift supply or demand, depending
  upon whether the tax is placed on the producers
  or the buyers.
• To understand the cost of the tax, compare
  welfare without the tax to welfare with the tax.
• After the tax, note the size of consumer surplus,
  producer surplus, tax revenue and deadweight
  loss.
• WHY IS THIS IMPORTANT? Later we will compare the
  cost of taxation to the cost of monopoly power.