lecture3 - Introductory Microeconomics LECTURE 3 DEMAND AND...

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Introductory Microeconomics LECTURE 3 – DEMAND AND SUPPLY 1. Announcements (i) Resources are available at the LMS subject site. Good idea to familiarize yourself with it. (ii) Subject Guide contains information on lecture outline and readings. (iii) Tutor consultations start next week (Week 3). (iv) MCT in Week 4 will cover Lectures 2, 3 and 4. 1
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(v) How to prepare for the MCT: There will be two practice tests available on the LMS website. One in the same format as the exam. Exam review sessions: Thursday, March 17, at 12pm, 1pm (repeat), and 3:15pm (repeat). Pitstops OLT 2
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2. Review of Lecture 2 Principles for a rational decision-maker: How to make choices? Use the benefit-cost principle: (i)Calculate MB and MC (Use opportunity cost; ignore sunk cost); (ii) Take an action if and only if MB is greater than or equal to MC. Why use this rule? It maximizes the ‘total net gain.’ Hence, it achieves the best outcome for the decision-maker. What does this imply about human behavior? Changes in benefits and/or costs optimal action changes. People respond to incentives. 3
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3. What we’ll do in this lecture (and the next) Our objective is to be able to answer questions such as: • How will drought affect output and prices of crops such as corn? • How will commodity prices change when there is a growing demand? What will be the effect on associated products such as bulk transport ships? • What explains the ups and downs of the Australian dollar? We’ll do this by learning the theory of perfectly competitive markets and how to apply it. 4
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The main elements of the perfectly competitive market model: Demand/Supply + Equilibrium To evaluate impact of an event (like a drought) or a policy change (like a new tax), first think about how demand/supply gets affected. “More than anyone else, Alfred Marshall helped make economics a field of study in its own right.” Stephen Pressman, Fifty Major Economists , 2006, p. 64.
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