lecture02 - Key issues demand supply market equilibrium...

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Key issues demand supply market equilibrium shocking the equilibrium effects of government interventions when to use supply and demand model
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Supply and demand model most widely-used economic model testable (like all good theories) describes how consumers and suppliers interact in a market to determine quantity of a good sold and its price
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To use supply and demand model you need to determine buyers' behavior sellers' behavior how they interact know whether the model is: applicable to the market under examination
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Quantity demanded is the amount of a good or service that consumers want to buy at a given price, holding constant other factors that affect demand
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What determines demand? tastes price of this good prices of other goods income information (cholesterol) government actions other factors: nicotine, . ..
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Demand curve shows quantity demanded —largest quantity that consumers are willing to buy—at each price, holding constant other factors that affect purchases note: quantity demanded of a good or service can exceed quantity sold (or vice versa) strange demand curve convention: price is on the vertical axis
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Demand Curve for Canadian Pork
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Effect of price changes movement along the demand curve demand curve is a concise summary of the answer to the question: what happens to the quantity demanded as the price changes, holding all other factors constant?
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Law of demand demand curves slope down 2200 a drop in price results in an increase in quantity demanded (holding other factors constant) one of the most important empirical finding in economics
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Demand effects of other factors change in any factor other than the price of the good causes a shift of the demand curve (not a movement along the demand curve ) this shift of the demand curve is a trick to avoid drawing 3D diagrams
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Effect on pork demand of a rise in price of beef beef is a substitute for pork at a given price of pork, a rise in the price of beef causes some people to switch from beef to pork
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A Shift of the Pork Demand Curve
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Summary change in the price of a good causes a movement along a demand curve change in any other factor besides the price causes a shift of the demand curve
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Variable definitions Q = quantity of pork demanded (million kg per year) P = price of pork ($ per kg) P b = price of beef ($ per kg) P c = price of poultry ($ per kg) I = income of consumers (thousand $)
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Demand function general function Q = D(P, P b , P c , I) specific (linear) pork demand function Q = 171 – 20 P + 20 P b + 3 P c + 2 I
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Summing demand curves total demand is sum of demand for all consumers suppose there are 2 consumers with demand curves: Q 1 = D 1 (P) Q 2 = D 2 (P) total quantity demanded = horizontal sum of quantity each consumer demands at each given price: Q = Q 1 + Q 2 = D 1 (P) + D 2 (P)
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lecture02 - Key issues demand supply market equilibrium...

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