Page 55 - Microeconomics, Fourth Edition

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2.1 DEMAND, SUPPLY, AND MARKET EQUILIBRIUM 29
All of these factors driving the price of corn upward went away in the latter half of 2008 and 2009:
The economic crisis reduced the global demand for corn. Oil prices fell, giving farmers some relief from
high fuel prices. Fear of a greatly reduced corn harvest in 2008 proved to be exaggerated. And weather
conditions returned to normal in 2009. As a result, in the second half of 2008, the price of corn fell
from its June 2008 peak of $5.47 per bushel to about $3.90 per bushel in early 2009. Because the shifts
in ethanol demand continue to affect the market for corn, this price exceeds the $2.00 per bushel level
of the early 2000s.
The tools of supply and demand analysis that we introduced in Chapter 1 can help us understand
the story that unfolded in the corn market over the past decade. In fact, they can help us understand
the pattern of prices that prevail in many markets, ranging from fresh-cut roses to electricity to pepper.

CHAPTER PREVIEW After reading and studying this chapter, you will be able to:
• Describe the three main building blocks of supply and demand analysis––demand curves, supply
curves, and the concept of market equilibrium.
• Analyze how changes in exogenous variables shift the demand and supply curves and thus change the
equilibrium price and quantity.

• Explain the concept of price elasticity.
• Calculate the price elasticity of demand for specific demand curves.
• Explain how price elasticity of demand is related to total revenue.

• Discuss the factors that determine the price elasticity of demand.
• Contrast the market-level price elasticity of demand with the brand-level price elasticity of demand.

• Explain and contrast other elasticities: the income elasticity of demand, the cross-price elasticity of
demand, and the price elasticity of supply.

• Indicate why the short-run price elasticities of demand and supply may differ from the long-run price
elasticities of demand and supply.
• Use “back-of-the-envelope” techniques to determine key properties of demand and supply curves
with only fragmentary data on prices, quantities, or elasticities.

Chapter 1 introduced equilibrium and comparative statics analysis. In this chapter, we 2.1
apply those tools to the analysis of perfectly competitive markets. Perfectly competitive DEMAND,
markets comprise large numbers of buyers and sellers. The transactions of any individ-
ual buyer or seller are so small in comparison to the overall volume of the good or ser- SUPPLY, AND
vice traded in the market that each buyer or seller “takes” the market price as given MARKET
when making purchase or production decisions. For this reason, the model of perfect EQUILIBRIUM
competition is often cited as a model of price-taking behavior.
Figure 2.2 illustrates the basic model of a perfectly competitive market. The
horizontal axis depicts the total quantity Q of a particular good—in this case corn—
that is supplied and demanded in this market. The vertical axis depicts the price P at
which this good is sold. A market can be characterized along three dimensions: