CHAP 3-4 - Supply, demand and elasticity_1

CHAP 3-4 - Supply, demand and elasticity_1 - Ch 3-4 Supply,...

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Ch 3-4 Ch 3-4 Supply, demand and Supply, demand and elasticity elasticity Olivier Giovannoni 304K – Introduction to Microeconomics
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Outline Outline 1. Definitions: markets and prices 2. Demand Law of demand / Changes in demand vs. changes in quant demanded 1. Supply Law of supply / Changes in supply vs. changes in quantities supplied 1. Equilibrium Definition Surplus, shortages and price adjustment 1. P, Q, equilibrium and changes in S and/or D 2. Price-elasticity of demand 3. Other elasticities of demand income elasticity / cross elasticity 1. Elasticity of supply Supply, demand and elasticity 2 Ch 3. Supply and demand Ch 4. elasticity
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1. Markets and prices 1. 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. Non-competitive markets (such as monopolies) deserve special attention and will be seen later in class. A competitive market is a market where nobody is able to influence the price this chapter Prices are determined by competition “no power influence” and “competition” usually requires a lot of buyers and sellers ( see “ perfect competition ” chapter) Note: 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 good) Relative prices are opportunity costs: the rate of Supply, demand and elasticity 3
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2. Demand 2. Demand “Demand” is what buyers want to buy, plan to buy, and can afford. Demand represents the willingness-and-ability to pay: the demand curve is also the marginal benefit curve. 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 coke vs. pepsi Supply, demand and elasticity 4
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2. Demand (. ..) 2. Demand (. ..) 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 called the demand curve . Supply, demand and elasticity 5
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2. Demand (. ..) 2. Demand (. ..) Supply, demand and elasticity 6 price quantity Demand curve: buying plans as a function of the selling price, ceteris paribus Important distinction: The “quantity demanded” is only one point on the curve that corresponds to a specific price, whereas “Demand” or “demand curve” refers to the whole set of points of the curve.
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2. Demand (. ..) 2. Demand (. ..) 1- The change in the quantity demanded is the change that originates from a change in prices.
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CHAP 3-4 - Supply, demand and elasticity_1 - Ch 3-4 Supply,...

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