CHAP 3-4 - Supply, demand and elasticity - updated

CHAP 3-4 - Supply, demand and elasticity - updated - CHAP...

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CHAP 3-4 CHAP 3-4 Supply, demand Supply, demand and elasticity and elasticity Olivier Giovannoni 304K – Introduction to Microeconomics Sept 10 2007
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5-point outline 5-point outline 1. Definitions: markets and prices 2. Demand Law of demand Changes in demand vs. in quantities demanded 3. Supply Law of supply Changes in supply vs. in quantities supplied 4. Equilibrium Definition Surplus, shortages and price adjustment 5. Price, quantity and changes in S and/or D Supply, demand and elasticity 2
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Markets and prices Markets and prices A market for a good is the set of all places where exchange takes place between sellers and buyers of that good A competitive market is a market where nobody is able to influence the price this chapter Prices are determined by competition “no influence” and “competition” usually requires a lot of buyers and sellers. You don’t need an actual “market location” anymore The prices we are talking about are relative prices (w/ resp. to the price of an alternative) Relative prices are opportunity costs Supply, demand and elasticity 3
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Demand Demand “Demand” is what buyers want to buy, plan to buy, and can afford. The law of demand : “There is a negative relationship between quantities demanded and the price, ceteris paribus The higher the ongoing price (as compared to the alternatives), the less buyers are going to buy Why #1: substitution effect: a (relative) price hike is an incentive to choose the alternatives (goods of substitution coke vs. pepsi ) Supply, demand and elasticity 4
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Demand (cont.) Demand (cont.) Why #2: income effect: People tend to preserve their income: when the price a commodity rises, you tend to buy less of it. Why #3: scarcity and decreasing marginal benefit: a scarce (but useful) good will usually be pricey. This is because its MB is high. As more and more of the scarce good is available, the MB will drop and the price will fall ( iPhone, iPod ) For each price corresponds a quantity demanded. The set of all prices and quantities demanded is called the demand schedule . The graph of the demand schedule is the demand curve . Supply, demand and elasticity 5
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Demand (cont.) Demand (cont.) Supply, demand and elasticity 6 price quantity Demand curve: buying plans as a function of the selling price, ceteris paribus “Demand” or “demand curve” refers to the whole set of points of the curve. The “quantity demanded” is only one point on the curve.
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Demand (cont.) Demand (cont.) 1- The change in the quantity demanded is the change that originates from a change in prices. → it’s a move along the curve Supply, demand and elasticity 7 price quantity B A C
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Demand (cont.) Demand (cont.) 2- The change in demand is the change that originates from the change in the external situation (everything except for the price of that
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CHAP 3-4 - Supply, demand and elasticity - updated - CHAP...

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