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Chapter 2 - Demand and supply analysis. This chapter presents the following content: Motivation – U.S. corn markets, competitive markets defined, the market demand curve, the market supply curve, equilibrium, characterizing demand and supply – elasticity, back of the envelope techniques. | Chapter 2 1 Demand and Supply Analysis Copyright (c)2014 John Wiley & Sons, Inc. 1 2 Chapter Two Overview Motivation – U.S. corn markets Competitive Markets Defined The Market Demand Curve The Market Supply Curve Equilibrium 6. Characterizing Demand and Supply – Elasticity 7. Back of the Envelope Techniques Chapter Two Copyright (c)2014 John Wiley & Sons, Inc. 3 Motivations Example: U.S. Corn Market Historical price: $2.00 per bushel Why do prices vary so much? Changes in Supply and Demand conditions affects pattern of prices Prices fell below $2.00 per bushel 2003-2004: 2004-2005: Prices rose to $3.00 per bushel Chapter Two 2006-2008: Prices rose above $5.00 per bushel 2008-2009: Prices fell to $3.90 per bushel Copyright (c)2014 John Wiley & Sons, Inc. 4 Motivations Example: U.S. Corn Market Chapter Two 2002-2003 Decrease in supply due to drought in the corn-growing states 2004-2005 Unexpectedly large U.S. corn crops 2006-2008 Changes in U.S. government policy Bubble years Increase . | Chapter 2 1 Demand and Supply Analysis Copyright (c)2014 John Wiley & Sons, Inc. 1 2 Chapter Two Overview Motivation – U.S. corn markets Competitive Markets Defined The Market Demand Curve The Market Supply Curve Equilibrium 6. Characterizing Demand and Supply – Elasticity 7. Back of the Envelope Techniques Chapter Two Copyright (c)2014 John Wiley & Sons, Inc. 3 Motivations Example: U.S. Corn Market Historical price: $2.00 per bushel Why do prices vary so much? Changes in Supply and Demand conditions affects pattern of prices Prices fell below $2.00 per bushel 2003-2004: 2004-2005: Prices rose to $3.00 per bushel Chapter Two 2006-2008: Prices rose above $5.00 per bushel 2008-2009: Prices fell to $3.90 per bushel Copyright (c)2014 John Wiley & Sons, Inc. 4 Motivations Example: U.S. Corn Market Chapter Two 2002-2003 Decrease in supply due to drought in the corn-growing states 2004-2005 Unexpectedly large U.S. corn crops 2006-2008 Changes in U.S. government policy Bubble years Increase in production costs due to oil price increases and rains and flooding wiped out corn crop 2008-2009 Weather conditions back to normal Economic Crisis Copyright (c)2014 John Wiley & Sons, Inc. 5 Defined: Competitive Markets Competitive Markets are those with sellers and buyers that are small and numerous enough that they take the market price as given when they decide how much to buy and sell. Chapter Two Copyright (c)2014 John Wiley & Sons, Inc. 6 The Market Demand Function The Market Demand Function tells us that the quantity of a good all consumers in the market are willing to buy is a function of various factors. Defined: Chapter Two Copyright (c)2014 John Wiley & Sons, Inc. 7 Market Demand Derived Demand The part of demand for a good that is derived from the production and sale of other goods. Direct Demand The part of demand for a good that comes from the desire of buyers to directly consume the good itself. Chapter Two Copyright (c)2014 John Wiley & Sons, Inc. 8 The Market Demand
