6th lecture - Economics 101 Lecture 6 The Invisible...

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Economics 101 Lecture 6
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The Invisible Hand “every individual necessarily labours to render the annual revenue of the society as great as he can. He generally, indeed, neither intends to promote the public interest, nor knows how much he is promoting it…he intends only his own gain, and he is in this, as in many other cases, led by an invisible hand to promote an end which was no part of his intention…By pursuing his own interest he frequently promotes that of the society more effectually than when he really intends to promote it. I have never known much good done by those who affected to trade for the public good.”
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Markets and Prices Why does Barry Bonds earn more than Andrea Peterson (national teacher of the year)?
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Why do diamonds cost more than water?
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Why do Picasso’s paintings sell for more than Leroy Nieman’s?
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Is it cost of production that determines prices (as Adam Smith thought)?
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Or is it willingness to pay that determines prices (as Stanley Jevons thought)?
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Alfred Marshall ( Principles of Economics , 1890) was the first to explain clearly how both costs and willingness to pay interact to determine market prices.
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The market for any good or service consists of all (actual or potential) buyers or sellers of that good or service.
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The market for lobsters in Portland, Maine, on July 20, 2004
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Price ($/lobster) Quantity (1000s of lobsters/day) 10 8 6 4 2 0 1 2 3 4 5 D D The demand curve is the set of all price-quantity pairs for which buyers are satisfied. ("Satisfied" means being able to buy the amount they want to at any given price.)
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Price ($/lobster) Quantity (1000s of lobsters/day) 10 8 6 4 2 0 1 2 3 4 5 D D Horizontal interpretation of the demand curve: If buyers face a price of $4/lobster, they will wish to purchase 4000 lobsters a day.
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Example 1.8 . How much memory should your computer have? Suppose that  random access  memory can be  added to your  computer at a  cost of $0.50 per  megabyte.
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MB MC 4000 3000 2000 1000 Megabytes of memory Value of an additional megabyte Dollars per megabyte 2.00 0.50 0.25 Cost of an additional megabyte 1.00
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If buyers are currently buying 4000 lobsters a day, the demand curve tells us that buyers would be willing to pay at most $4 for one additional lobster. Price ($/lobster)
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6th lecture - Economics 101 Lecture 6 The Invisible...

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