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### e103Slect03

Course: E 103, Fall 2009
School: Sveriges...
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Word Count: 578

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Law The of Demand Diminishing Marginal Value (MV) We've mentioned and used diminishing marginal value already when we looked into the Principle of Substitution and gains from trade Diminishing MV is assumed to hold for everything people have no problem to accept it for most goods but we assume it also holds for those often called &quot;necessities&quot; and &quot;bads&quot; etc The maximum...

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Law The of Demand Diminishing Marginal Value (MV) We've mentioned and used diminishing marginal value already when we looked into the Principle of Substitution and gains from trade Diminishing MV is assumed to hold for everything people have no problem to accept it for most goods but we assume it also holds for those often called "necessities" and "bads" etc The maximum amount of a substitute good one is willing to give up in order to obtain an additional unit of a given good declines the more one has of the given good, ceteris paribus "to obtain an additional unit" is "on margin" in the professional slang "ceteris paribus" is "other things held constant" very important not to forget (icecream stand moving closer) Income and Prices The two simple assumptions to have ceteris paribus implicitly satisfied: One, incomes are fixed (no borrowing, no indeterminacy when choice is made) Two, price of a good is the only cost incurred to obtain a unit of the good These two are not really restrictive income changes we`ll analyse later separately; "price the only cost" assumption just implies that we have to treat other costs in a specific way (recognize them as a part of an effective price) Also, we restrict our analysis to the case of two goods for now Just as MV of one good is measured in units of another good, income and prices will be in units of the good one has to give up in order to obtain a unit of a given good these are called real income and relative price The real income is I = M/pi = how much good one can buy with nominal income M Note: Neutral inflation does not matter for consumption (+ proper sense of this statement) The relative price of good i is pi/pj = how of much the other good one has to give up in order to obtain a unit of the given good Choices are made based on relative prices and real incomes, not nominal ones (that's also why we say Economics in NOT about money) The Law of Demand 1 There is an inverse relationship between a good's price and its quantity demanded, ceteris paribus The demand curve The Law of Demand results from the principles of Maximization, Substitution, and Diminishing MV >>> a consumer is in equilibrium when P = MV Examples of the Law: Boxing Week sale (or any other sale), shopping trips to the USA, genderspecific promiscuity, gas is not a "necessity," how seatbelts kill people, concealed handguns and violent crimes (esp. against women) The "Third Law of Demand" ("Shipping Good Apples Out," "AlchianAllen Theorem"): A fixed charge applied to both high and low quality goods results in higher relative consumption of the high quality good Examples: transportation cost (original apple shipping observation), tax (and pos...

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Sveriges lantbruksuniversitet - E - 103
Demand II Changes in demand refer to shifts in the demand curve Graphs Changes in demand result from changes other that price changes we call those &quot;exogenous&quot; changes (or changes in exogenous parameters). They are exogenous to our demand
Sveriges lantbruksuniversitet - E - 103
Market Demand The way to look at the exchange between many people is to look at the market demand and supply curves The market demand curve is a horizontal sum of the individual demands Remember that the area under an individual demand curve up t
Sveriges lantbruksuniversitet - E - 103
Changes in Supply Since the supply curve is determined by a) prices of inputs and b) technology (production function), a change in one of those will change the supply curve An improvement in technology would increase quantity supplied at every pri
Sveriges lantbruksuniversitet - E - 103
Applications of the Neoclassical Model Shifts in Supply and Demand: Increases in demand lead to (demand curve shift along supply curve) an increased equilibrium price and an increased equilibrium quantity Decreases in demand lead to (demand curve
Sveriges lantbruksuniversitet - E - 103
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Sveriges lantbruksuniversitet - E - 103
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Sveriges lantbruksuniversitet - E - 103
So far we have been thinking about a firm's decision WITHOUT an explicit mention of the other firms in the same industry (market). A perfectly competitive firm (i.e. a firm too small to influence the market price) does not have to bother thinking
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