Microeconomics: by Robert S. Pindyck Daniel Rubinfeld Ninth Edition

MICROECONOMICS
by Robert S. Pindyck
Daniel Rubinfeld
Ninth Edition
Copyright © 2016, 2012, 2009 Pearson Education, Inc. All Rights Reserved
Chapter 2
The Basics of Supply and Demand (1 of 2)
CHAPTER OUTLINE LIST OF EXAMPLES
2.1 Supply and Demand
2.1 The Price of Eggs and the Price of a College
2.2 The Market Mechanism Education Revisited
2.3 Changes in Market Equilibrium 2.2 Wage Inequality in the United States
2.4 Elasticities of Supply and Demand 2.3 The Long-Run Behavior of Natural Resource
2.5 Short-Run versus Long-Run Elasticities Prices
2.6 Understanding and Predicting the Effects of 2.4 The Effects of 9/11 on the Supply and Demand
Changing Market Conditions for New York City Office Space
2.7 Effects of Government Intervention—Price Controls 2.5 The Market for Wheat
2.6 The Demand for Gasoline and Automobiles
2.7 The Weather in Brazil and the Price of Coffee in

New York
2.8 The Behavior of Copper Prices
2.9 Upheaval in the World Oil Market
2.10 Price Controls and Natural Gas Shortages
The Basics of Supply and Demand (2 of 2)
Supply-demand analysis is a fundamental and powerful tool that can be applied to a wide
variety of interesting and important problems. To name a few:
• Understanding and predicting how changing world economic conditions affect market
price and production
• Evaluating the impact of government price controls, minimum wages, price supports,
and production incentives
• Determining how taxes, subsidies, tariffs, and import quotas affect consumers and
producers
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2.1 Supply and Demand (1 of 4)

The Supply Curve
supply curve Relationship between the quantity of a good
that producers are willing to sell and the price of the good.
QS  QS(P )
FIGURE 2.1
THE SUPPLY CURVE
The supply curve, labeled S in the figure, shows how the

quantity of a good offered for sale changes as the price of
the good changes. The supply curve is upward sloping:
The higher the price, the more firms are able and willing to
produce and sell.
If production costs fall, firms can produce the same

quantity at a lower price or a larger quantity at the same
price. The supply curve then shifts to the right (from S to
S′).
OTHER VARIABLES THAT AFFECT SUPPLY
The quantity that producers are willing to sell depends not only on the price they receive
but also on their production costs, including wages, interest charges, and the costs of raw
materials.
When production costs decrease, output increases no matter what the market price
happens to be. The entire supply curve thus shifts to the right.
Economists often use the phrase change in supply to refer to shifts in the supply curve,
while reserving the phrase change in the quantity supplied to apply to movements along the
supply curve.
9/17/2018 6

The Demand Curve
demand curve Relationship between the quantity of a good that
consumers are willing to buy and the price of the good.
QD  QD(P )
FIGURE 2.2
THE DEMAND CURVE
The demand curve, labeled D, shows how the quantity of a good

demanded by consumers depends on its price. The demand curve
is downward sloping; holding other things equal, consumers will
want to purchase more of a good as its price goes down.
The quantity demanded may also depend on other variables, such

as income, the weather, and the prices of other goods.
For most products, the quantity demanded increases when income

rises. A higher income level shifts the demand curve to the right
(from D to D′).
SHIFTING THE DEMAND CURVE
If the market price were held constant at P1, we would

expect to see an increase in the quantity demanded—
say, from Q1 to Q2, as a result of consumers’ higher
incomes. Because this increase would occur no matter
what the market price, the result would be a shift to the
right of the entire demand curve.
SUBSTITUTE AND COMPLEMENTARY GOODS
Substitutes Two goods for which an increase in the price

of one leads to an increase in the quantity demanded of
the other.
Complements Two goods for which an increase in the

price of one leads to a decrease in the quantity
demanded of the other.
2.2 The Market Mechanism (1 of 3)
FIGURE 2.3
SUPPLY AND DEMAND
The market clears at price P0 and quantity Q0.
At the higher price P1, a surplus develops, so

price falls.
At the lower price P2, there is a shortage, so

price is bid up.
EQUILIBRIUM
equilibrium (or market clearing) price Price that equates the quantity supplied to the
quantity demanded.
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.
WHEN CAN WE USE THE SUPPLY-DEMAND MODEL?
We are assuming that at any given price, a given quantity will be produced and sold.
This assumption makes sense only if a market is at least roughly competitive. By this
we mean that both sellers and buyers should have little market power—i.e., little ability
individually to affect the market price.
Suppose instead that supply were controlled by a single producer—a monopolist. If the
demand curve shifts in a particular way, it may be in the monopolist’s interest to keep the
quantity fixed but change the price, or to keep the price fixed and change the quantity.
2.3 Changes in Market Equilibrium (1 of 3)
FIGURE 2.4
NEW EQUILIBRIUM FOLLOWING SHIFT IN SUPPLY
When the supply curve shifts to the right, the market

clears at a lower price P3 and a larger quantity Q3.
FIGURE 2.5
NEW EQUILIBRIUM FOLLOWING SHIFT IN DEMAND
When the demand curve shifts to the right, the market

clears at a higher price P3 and a larger quantity Q3.
FIGURE 2.6
NEW EQUILIBRIUM FOLLOWING SHIFTS IN

SUPPLY AND DEMAND
Supply and demand curves shift over time as market

conditions change.
In this example, rightward shifts of the supply and

demand curves lead to a slightly higher price and
a much larger quantity.
In general, changes in price and quantity depend on

the amount by which each curve shifts and the shape
of each curve.
EXAMPLE 2.1 (1 of 2)
THE PRICE OF EGGS AND THE PRICE OF A COLLEGE EDUCATION REVISITED
From 1970 to 2010, the real (constant-dollar) price of eggs

fell by 55 percent, while the real price of a college
education rose by 82 percent.
The mechanization of poultry farms sharply reduced the

cost of producing eggs, shifting the supply curve
downward. The demand curve for eggs shifted to the left
as a more health-conscious population tended to avoid
eggs.
As for college, increases in the costs of equipping and

maintaining modern classrooms, laboratories, and
libraries, along with increases in faculty salaries, pushed
the supply curve up. The demand curve shifted to the right
as a larger percentage of a growing number of high school
graduates decided that a college education was essential.
FIGURE 2.7 THE PRICE OF EGGS AND THE PRICE OF A COLLEGE EDUCATION
REVISITED
(a) MARKET FOR EGGS
(a) The supply curve for eggs shifted downward as

production costs fell; the demand curve shifted to the left
as consumer preferences changed.
As a result, the real price of eggs fell sharply and egg

consumption rose.
(b) MARKET FOR COLLEGE EDUCATION
(b) The supply curve for a college education shifted up as

the costs of equipment, maintenance, and staffing rose.
The demand curve shifted to the right as a growing

number of high school graduates desired a college
education. As a result, both price and enrollments rose
sharply.
EXAMPLE 2.2
WAGE INEQUALITY IN THE UNITED STATES
Over the past two decades, the wages of skilled high-income workers have grown
substantially, while the wages of unskilled low-income workers have fallen slightly.
From 1978 to 2009, people in the top 20 percent of the income distribution experienced an
increase in their average real (inflation-adjusted) pretax household income of 45 percent,
while those in the bottom 20 percent saw their average real pretax income increase by only
4 percent.
While the supply of unskilled workers—people with limited educations—has grown

substantially, the demand for them has risen only slightly.
On the other hand, while the supply of skilled workers—e.g., engineers, scientists,
managers, and economists—has grown slowly, the demand has risen dramatically, pushing
wages up.
THE LONG-RUN BEHAVIOR OF NATURAL RESOURCE PRICES
FIGURE 2.8
CONSUMPTION AND PRICE OF COPPER
Although annual consumption of copper has

increased about a hundredfold, the real
(inflation-adjusted) price has not changed
much.
THE LONG-RUN BEHAVIOR OF NATURAL RESOURCE PRICES
FIGURE 2.9
LONG-RUN MOVEMENTS OF SUPPLY AND DEMAND

FOR MINERAL RESOURCES
Although demand for most resources has increased

dramatically over the past century, prices have fallen or
risen only slightly in real (inflation-adjusted) terms
because cost reductions have shifted the supply curve
to the right just as dramatically.
EXAMPLE 2.4
THE EFFECTS OF 9/11 ON THE SUPPLY AND DEMAND FOR NEW YORK CITY
OFFICE SPACE
FIGURE 2.10
SUPPLY AND DEMAND FOR NEW YORK

CITY OFFICE SPACE
Following 9/11 the supply curve shifted to the

left, but the demand curve also shifted to the
left, so that the average rental price fell.
2.4 Elasticities of Supply and Demand
(1 of 6)
elasticity Percentage change in one variable resulting from a 1-percent increase in
another.
PRICE ELASTICITY OF DEMAND
price elasticity of demand Percentage change in quantity demanded of a good resulting

from a 1-percent increase in its price.
E p  (%ΔQ )/(%ΔP )
Δ Q /Q PΔQ
Ep   (2.1)
Δ P /P QΔP
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2.4 Elasticities of Supply and Demand (2 of 6)

LINEAR DEMAND CURVE
linear demand curve Demand curve that is a straight line.
Q  a  bp
FIGURE 2.11
LINEAR DEMAND CURVE
The price elasticity of demand depends not only on the

slope of the demand curve but also on the price and
quantity.
The elasticity, therefore, varies along the curve as price

and quantity change. Slope is constant for this linear
demand curve.
Near the top, because price is high and quantity is small,

the elasticity is large in magnitude. The elasticity becomes
smaller as we move down the curve.
FIGURE 2.12
(a) INFINITELY ELASTIC DEMAND
(a) For a horizontal demand curve, ∆Q/∆P is infinite.

Because a tiny change in price leads to an enormous
change in demand, the elasticity of demand is infinite.
infinitely elastic demand Principle that consumers will buy as much of a good as they can
get at a single price, but for any higher price the quantity demanded drops to zero, while for
any lower price the quantity demanded increases without limit.
FIGURE 2.12
(b) COMPLETELY INELASTIC DEMAND
(b) For a vertical demand curve, ∆Q/ ∆P is zero.

Because the quantity demanded is the same no matter
what the price, the elasticity of demand is zero.
completely inelastic demand Principle that consumers will buy a fixed quantity of a good
regardless of its price.
OTHER DEMAND ELASTICITIES
income elasticity of demand Percentage change in the quantity demanded resulting from
a 1-percent increase in income.
Δ Q/Q I ΔQ
E   (2.2)
I
Δ I/I Q ΔI
ΔQb /Qb Pm ΔQb
EQbPm   (2.3)
ΔPm /Pm Qb ΔPm
cross-price elasticity of demand Percentage change in the quantity demanded of one
good resulting from a 1-percent increase in the price of another.
ELASTICITIES OF SUPPLY
price elasticity of supply Percentage change in quantity supplied resulting from a
1-percent increase in price.
Point versus Arc Elasticities
point elasticity of demand Price elasticity at a particular point on the demand curve.
ARC ELASTICITY OF DEMAND
arc elasticity of demand Price elasticity calculated over a range of prices.
Arcelasticity: EP  ( ΔQ ΔP )(P Q ) (2.4)
THE MARKET FOR WHEAT
During recent decades, changes in the wheat market

had major implications for both American farmers and
U.S. agricultural policy.
To understand what happened, let’s examine the

behavior of supply and demand beginning in 1981.
Supply : QS 1800  240P
Demand : QD  3550  266P
By setting the quantity supplied equal to the quantity demanded, we can determine the
market-clearing price of wheat for 1981:
QS  QD
1800  240P  3550  266P
506P 1750
P  $3.46 per bushel
Substituting into the supply curve equation, we get
Q  1800  (240)(3.46 )  2630 million bushels
We use the demand curve to find the price elasticity of demand:

P ΔQD 3.46
EPD   ( 266)   0.35
Q ΔP 2630
Thus demand is inelastic.
We can likewise calculate the price elasticity of supply

P ΔQS 3.46
EPS   (240)  0.36
Q ΔP 2630
Suppose that a drought caused the supply curve to shift far enough to the left to push the
price up to $4.00 per bushel. In this case, the quantity demanded would fall to 3550 –
(266)(4.00) = 2486 million bushels. At this price and quantity, the elasticity of demand would
be
4.00
EPD  ( 266)   0.43
2480
In 2007, demand and supply were
Demand : QD  2900  125P
Supply : QS  1460  115P

The market-clearing (nominal) price and quantity are:
1460  115P  2900  125P
P  $6 per bushel
Q  1460  (115)(6)  2150 million bushels
Dry weather and heavy rains, combined with increased export demand caused the price
to rise considerably. You can check to see that, at the 2007 price and quantity, the price
elasticity of demand was –0.35 and the price elasticity of supply 0.32. Given these low
elasticities, it is not surprising that the price of wheat rose so sharply.
FIGURE 2.13
THE PRICE OF WHEAT IN THE U.S.
The price of wheat fluctuates in response to

the weather and changes in export demand.
2.5 Short-Run versus Long-Run Elasticities
(1 of 5)
Demand
FIGURE 2.14
(a) GASOLINE: SHORT-RUN AND LONG-RUN

DEMAND CURVES
(a) In the short run, an increase in price has only a

small effect on the quantity of gasoline demanded.
Motorists may drive less, but they will not change
the kinds of cars they are driving overnight.
In the longer run, however, because they will shift

to smaller and more fuel-efficient cars, the effect of
the price increase will be larger. Demand,
therefore, is more elastic in the long run than in the
short run.
(2 of 5)
DEMAND AND DURABILITY
FIGURE 2.14
(b) AUTOMOBILES: SHORT-RUN AND LONG-RUN

DEMAND CURVES
(b) The opposite is true for automobile demand.

If price increases, consumers initially defer buying
new cars; thus annual quantity demanded falls sharply.
In the longer run, however, old cars wear out and must
be replaced; thus annual quantity demanded picks up.
Demand, therefore, is less elastic in the long run than
in the short run.
(3 of 5)
INCOME ELASTICITIES
Income elasticities also differ from the short run to the long run.
For most goods and services—foods, beverages, fuel, entertainment, and so on— the
income elasticity of demand is larger in the long run than in the short run.
For a durable good, the opposite is true. The short-run income elasticity of demand will be
much larger than the long-run elasticity.
(4 of 5)
CYCLICAL INDUSTRIES
cyclical industries Industries in which sales tend to magnify cyclical changes in gross
domestic product and national income.
FIGURE 2.15
GDP AND INVESTMENT IN DURABLE

EQUIPMENT
Annual growth rates are compared for GDP

and investment in durable equipment.
Because the short-run GDP elasticity of

demand is larger than the long-run elasticity
for long-lived capital equipment, changes in
investment in equipment magnify changes in
GDP. Thus capital goods industries are
considered “cyclical.”
(5 of 5)
FIGURE 2.16
CONSUMPTION OF DURABLES VERSUS

NONDURABLES
Annual growth rates are compared for GDP, consumer

expenditures on durable goods (automobiles, appliances,
furniture, etc.), and consumer expenditures on
nondurable goods (food, clothing, services, etc.).
Because the stock of durables is large compared with

annual demand, short-run demand elasticities are larger
than long-run elasticities. Like capital equipment,
industries that produce consumer durables are “cyclical”
(i.e., changes in GDP are magnified).
This is not true for producers of nondurables.
EXAMPLE 2.6
THE DEMAND FOR GASOLINE AND AUTOMOBILES
TABLE 2.1 DEMAND FOR GASOLINE TABLE 2.2 DEMAND FOR AUTOMOBILES
NUMBER OF YEARS ALLOWED TO PASS NUMBER OF YEARS ALLOWED TO PASS

FOLLOWING A PRICE OR INCOME CHANGE FOLLOWING A PRICE OR INCOME CHANGE
ELASTICITY 1 2 3 5 10 ELASTICITY 1 2 3 5 10
Price −0.2 −0.3 −0.4 −0.5 −0.8 Price −1.2 −0.9 −0.8 −0.6 −0.4
Income 0.2 0.4 0.5 0.6 1.0 Income 3.0 2.3 1.9 1.4 1.0
(1 of 2)
Supply
SUPPLY AND DURABILITY
FIGURE 2.17
COPPER: SHORT-RUN AND LONG-RUN SUPPLY

CURVES
Like that of most goods, the supply of primary copper,

shown in part (a), is more elastic in the long run.
If price increases, firms would like to produce more but

are limited by capacity constraints in the short run.
In the longer run, they can add to capacity and produce

more.
(2 of 2)
FIGURE 2.17
COPPER: SHORT-RUN AND LONG-RUN SUPPLY CURVES
Part (b) shows supply curves for secondary copper.
If the price increases, there is a greater incentive to convert scrap

copper into new supply. Initially, therefore, secondary supply (i.e.,
supply from scrap) increases sharply.
But later, as the stock of scrap falls, secondary supply contracts.
Secondary supply is therefore less elastic in the long run than in the
short run.
TABLE 2.3 SUPPLY OF COPPER
PRICE ELASTICITY OF: SHORT-RUN LONG-RUN

Primary supply 0.20 1.60
Secondary supply 0.43 0.31
Total supply 0.25 1.50
THE WEATHER IN BRAZIL AND THE PRICE OF COFFEE IN NEW YORK
FIGURE 2.18
PRICE OF BRAZILIAN COFFEE
When droughts or freezes damage Brazil’s coffee trees, the price of coffee can soar.
The price usually falls again after a few years, as demand and supply adjust.
THE WEATHER IN BRAZIL AND THE PRICE OF COFFEE IN NEW YORK
FIGURE 2.19
SUPPLY AND DEMAND FOR COFFEE
A freeze or drought in Brazil causes the supply curve to shift to the left. In the short run, supply is completely
inelastic; only a fixed number of coffee beans can be harvested. Demand is also relatively inelastic; consumers
change their habits only slowly. As a result, the initial effect of the freeze is a sharp increase in price, from
P0 to P1.
In the intermediate run, supply and demand are both more elastic; thus price falls part of the way back, to P2 In
the long run, supply is extremely elastic; because new coffee trees will have had time to mature, the effect of the
freeze will have disappeared. Price returns to P0.
2.6 Understanding and Predicting the Effects
of Changing Market Conditions (1 of 2)
FIGURE 2.20
FITTING LINEAR SUPPLY AND DEMAND CURVES

TO DATA
Linear supply and demand curves provide a convenient

tool for analysis.
Given data for the equilibrium price and quantity P* and

Q*, as well as estimates of the elasticities of demand
and supply ED and ES, we can calculate the parameters
c and d for the supply curve and a and b for the
demand curve. (In the case drawn here, c < 0.) The
curves can then be used to analyze the behavior of the
market quantitatively.
2.6 Understanding and Predicting the Effects of
Changing Market Conditions (2 of 2)
Our goal is to find the values of the
constants a, b, c, and d. in the supply and
demand equations based on the known
values for ES, ED, P*, and Q*.
Similar procedure when demand depends

also on another factor such as income.
THE BEHAVIOR OF COPPER PRICES
After reaching a level of about $1.00 per pound in 1980, the price of copper fell sharply
to about 60 cents per pound in 1986.
Worldwide recessions in 1980 and 1982 contributed to the decline of copper prices.
Why did the price increase so sharply after 2003? First, the demand for copper from
China and other Asian countries began increasing dramatically. Second, because prices
had dropped so much from 1996 through 2003, producers closed unprofitable mines and
cut production.
What would a decline in demand do to the price of copper? To find out, we can use the
linear supply and demand curves.
FIGURE 2.21
COPPER PRICES, 1965–2011
Copper prices are shown in both nominal (no adjustment

for inflation) and real (inflation-adjusted) terms. In real
terms, copper prices declined steeply from the early
1970s through the mid-1980s as demand fell. In 1988–
1990, copper prices rose in response to supply
disruptions caused by strikes in Peru and Canada but
later fell after the strikes ended. Prices declined during
the 1996–2002 period but then increased sharply
starting in 2005.
FIGURE 2.22
COPPER SUPPLY AND DEMAND
The shift in the demand curve corresponding to a 20-

percent decline in demand leads to a 10.7-percent
decline in price.
UPHEAVAL IN THE WORLD OIL MARKET
Since the early 1970s, the world oil market has
been buffeted by the OPEC cartel and by
political turmoil in the Persian Gulf.
FIGURE 2.23
PRICE OF CRUDE OIL
The OPEC cartel and political events caused the

price of oil to rise sharply at times. It later fell as
supply and demand adjusted.
Because this example is set in 2009–2011, all prices are measured in 2011 dollars. Here
are some rough figures:
• 2009–2011 world price = $80 per barrel
• World demand and total supply = 32 billion barrels per year (bb/yr)
• OPEC supply = 13 bb/yr
• Competitive (non-OPEC) supply = 19 bb/yr
The following table gives price elasticity estimates for oil supply and demand:
Blank Cell SHORT RUN LONG RUN

World demand: –0.05 –0.30
Competitive supply: 0.05 0.30
FIGURE 2.24
IMPACT OF SAUDI PRODUCTION CUT
The total supply is the sum of competitive (non-OPEC) supply and the 12 bb/yr of OPEC supply.
Part (a) shows the short-run supply and demand curves. If Saudi Arabia stops producing, the supply curve will shift to the
left by 3.6 bb/yr. In the short-run, price will increase sharply.
Part (b) shows long-run curves. In the long run, because demand and competitive supply are much more elastic, the
impact on price will be much smaller.
2.7 Effects of Government Intervention—
Price Controls
FIGURE 2.25
EFFECTS OF PRICE CONTROLS
Without price controls, the market clears at

the equilibrium price and quantity P0 and Q0.
If price is regulated to be no higher than

Pmax, the quantity supplied falls to Q1, the
quantity demanded increases to Q2, and a
shortage develops.
PRICE CONTROLS AND NATURAL GAS SHORTAGES
FIGURE 2.26
PRICE OF NATURAL GAS
Natural gas prices rose sharply after 2000, as

did the prices of oil and other fuels.
PRICE CONTROLS AND NATURAL GAS SHORTAGES
• The (free-market) wholesale price of natural gas was $6.40 per mcf (thousand cubic
feet);
• Production and consumption of gas were 23 Tcf (trillion cubic feet);
• The average price of crude oil (which affects the supply and demand for natural gas) was
about $50 per barrel.
Supply : Q  15.90  0.72PG  0.05PO
Demand : Q  0.02  1.8PG  0.69PO

Substitute $3.00 for PG in both the supply and demand equations (keeping the price of oil,
PO, fixed at $50).
You should find that the supply equation gives a quantity supplied of 20.6 Tcf and the
demand equation a quantity demanded of 29.1 Tcf.
Therefore, these price controls would create an excess demand of 29.1 − 20.6 = 8.5 Tcf.
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MICROECONOMICS

2.6 The Demand for Gasoline and Automobiles

2.7 The Weather in Brazil and the Price of Coffee in

2.8 The Behavior of Copper Prices

2.9 Upheaval in the World Oil Market

2.10 Price Controls and Natural Gas Shortages

2.1 Supply and Demand (1 of 4)

THE SUPPLY CURVE

The supply curve, labeled S in the figure, shows how the

If production costs fall, firms can produce the same

2.1 Supply and Demand (3 of 4)

THE DEMAND CURVE

The demand curve, labeled D, shows how the quantity of a good

The quantity demanded may also depend on other variables, such

For most products, the quantity demanded increases when income

If the market price were held constant at P1, we would

SUBSTITUTE AND COMPLEMENTARY GOODS

Substitutes Two goods for which an increase in the price

Complements Two goods for which an increase in the

SUPPLY AND DEMAND

The market clears at price P0 and quantity Q0.

At the higher price P1, a surplus develops, so

At the lower price P2, there is a shortage, so

NEW EQUILIBRIUM FOLLOWING SHIFT IN SUPPLY

When the supply curve shifts to the right, the market

NEW EQUILIBRIUM FOLLOWING SHIFT IN DEMAND

When the demand curve shifts to the right, the market

NEW EQUILIBRIUM FOLLOWING SHIFTS IN

Supply and demand curves shift over time as market

In this example, rightward shifts of the supply and

In general, changes in price and quantity depend on

From 1970 to 2010, the real (constant-dollar) price of eggs

The mechanization of poultry farms sharply reduced the

As for college, increases in the costs of equipping and

(a) MARKET FOR EGGS

(a) The supply curve for eggs shifted downward as

As a result, the real price of eggs fell sharply and egg

(b) MARKET FOR COLLEGE EDUCATION

(b) The supply curve for a college education shifted up as

The demand curve shifted to the right as a growing

While the supply of unskilled workers—people with limited educations—has grown

CONSUMPTION AND PRICE OF COPPER

Although annual consumption of copper has

LONG-RUN MOVEMENTS OF SUPPLY AND DEMAND

Although demand for most resources has increased

SUPPLY AND DEMAND FOR NEW YORK

Following 9/11 the supply curve shifted to the

PRICE ELASTICITY OF DEMAND

price elasticity of demand Percentage change in quantity demanded of a good resulting

2.4 Elasticities of Supply and Demand (2 of 6)

LINEAR DEMAND CURVE

The price elasticity of demand depends not only on the

The elasticity, therefore, varies along the curve as price

Near the top, because price is high and quantity is small,

(a) INFINITELY ELASTIC DEMAND

(a) For a horizontal demand curve, ∆Q/∆P is infinite.

(b) COMPLETELY INELASTIC DEMAND

(b) For a vertical demand curve, ∆Q/ ∆P is zero.

ARC ELASTICITY OF DEMAND