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Demand and Supply Analysis: Intro
the economic tools for understanding how product and resource markets function and the competitive characteristics of different industries
Markets for goods and services to consumers are referred to as goods markets or product markets.
Markets for factors of production (raw materials, goods and services used in production) are referred to as factor markets.
Goods and services used in the production of final goods and services are referred to as intermediate goods.
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Practice
Aggregating consumer demand,
Calculating consumer and producer...,
Calculating elasticities
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A Distinguish Among Types of Markets
Distinguish among types of markets
SchweserNotes: Book 2 p.8
CFA Program Curriculum: Vol.2 p.7
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B Explain the Principles of Demand and Supply
The quantity supplied is greater at higher prices. The quantity demanded is greater at lower prices.
A demand function provides the quantity demanded as a function of price of the good or service, the prices of related goods or services, and some measure of income.
A supply function provides the quantity supplied as a function of price of the good or service and the prices of productive inputs, and depends on the technology used to produce the good or service.
Using values for all the variabl
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C Describe causes of shifts in and movements along demand and supply curves
The change in quantity demanded (supplied) in response to a change in price represents a movement along a demand (supply) curve, not a change in demand (supply).
Changes in demand (supply) refer to shifts in a demand (supply) curve.
Demand is affected by changes in consumer tastes and typically increases (shifts to the right) with increases in income, increases in the price of substitute goods, or decreases in the price of complementary goods.
Supply is increased (shifted to the right) by adv
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D Describe the Process of Aggregating Demand and Supply Curves
The aggregate or market demand (supply) function is calculated by summing the quantities demanded (supplied) at each price for individual demand (supply) functions.
SchweserNotes: Book 2 p.12
CFA Program Curriculum: Vol.2 p.17
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E Describe the concept of equilibrium (partial and general), and mechanisms by which markets achieve equilibrium
In free markets, the equilibrium price is the price at which the quantity demanded equals the quantity supplied. When the market price is greater than the equilibrium price, the quantity supplied is greater than the quantity demanded (excess supply), and competition among suppliers for sales will drive the price down towards the equilibrium price. When the market price is less than the equilibrium price, the quantity demanded is greater than the quantity supplied (excess demand), and competition
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F Distinguish between stable and unstable equilibria, including price bubbles, and ID instances of such equilibria
A stable equilibrium is one for which movement of the price away from its equilibrium level results in forces that drive the price back towards equilibrium. An unstable equilibrium is one for which a movement of the price away from its equilibrium level results in forces that move the price further from its equilibrium level.
While price equilibria are typically stable, if the supply curve is downward sloping and less steep than the demand curve, the resulting equilibrium is unstable.
The term
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G,H Calc and Interp indiv and agg D, and inverse D and S functions, and intep indiv and agg D and S curves+excess D or S associated w/ a non-equilibria P
G. Given an individual’s demand function for Good X, QDX = f (price of Good X, price of Good A, price of Good B, income), we can insert values for income and the prices of related goods A and B to get quantity demanded as a function of only the price of Good X. We can invert this function (solve for PX) to get a demand curve (i.e., price as a function of quantity demanded).
Given a firm’s supply function for Good X, QSX = f (price of Good X, price of input A, price of input B) for a specific
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I Describe types of auctions and calculate the winning prices of an auction
A common value auction is an auction for a good (e.g., rights to mineral extraction) which has the same value to all bidders, even though this value may not be known with certainty at the time of the auction. The highest bidder may be the one who most overvalues the item (winner’s curse).
A private value auction is an auction for a good (e.g., Van Gogh painting) for which the value is different to each bidder. Bidders are not expected to bid amounts greater than their private value of the item.
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J Calc and Interp consumer surplus, producer surplus, and total surplus
The equilibrium quantity and price lead to optimal allocation of resources because the allocation maximizes the difference between the cost of producing and the total value to consumers of the traded quantity of a good.
Consumer surplus is the excess consumers would be willing to pay above what they actually pay for the equilibrium quantity of a good or a service and is represented by the triangle bounded by the demand curve, the equilibrium price, and the left-hand axis. For a linear demand cu
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K,L Desc how Gov reg. and intervention affect D and S
K. Imposition of an effective maximum price (price ceiling) by the government results in excess demand, while imposition of an effective minimum price (price floor) results in excess supply.
Imposition of an effective quota reduces supply. Payment of a subsidy to producers increases supply.
Imposition of a tax on suppliers reduces supply. Imposition of a tax on consumers reduces demand.
L. Imposition of a price ceiling will reduce price and decrease the traded quantity to the quantity suppl
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M Calc, Interp price, income, and cross-price elastcs of D and describe factors that affect each measure
Elasticity is measured as the ratio of the percentage change in one variable to a percentage change in another. Three elasticities related to a demand function are of interest:
|own price elasticity| > 1: demand is elastic
|own price elasticity| < 1: demand is inelastic
cross price elasticity > 0: related good is a substitute
cross price elasticity < 0: related good is a complement
income elasticity < 0: good is an inferior good
income elasticity > 0: good is a normal good
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g calculate and interpret individual and aggregate demand, and inverse demand and supply functions, and interpret individual and aggregate demand and supply curves;
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h calculate and interpret the amount of excess demand or excess supply associated with a non-equilibrium price;
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k describe how government regulation and intervention affect demand and supply;
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l forecast the effect of the introduction and the removal of a market interference (e.g., a price floor or ceiling) on price and quantity;
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L1 13 Demand and Supply Analysis: Introduction
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