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# L6 - Economics 101:Principles of Microeconomics Professor...

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Economics 101:Principles of  Microeconomics Professor Jo Hertel Lecture 7 – Review Exam announcements: Calculators allowed, no books, no notes Exam rooms according to sections you’re officially enrolled in - posted on www.ssc.wisc.edu/~jhertel/exam.htm A note about exam length

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2 About solving problems First: what assumptions does your model have? (what specifics are you given in the question?) Where you are not given specifics, assume the most standard model Second: go step by step, using only reasoning from the model you’re using! (knowing definitions is important here) When in doubt, a graph often helps.
3 1-Supply, demand & equilibrium Standard model: upward sloping supply, downward sloping demand If not told otherwise, assume the market is in equilibrium price quantity S D p* q* The demand curve shows quantity demanded at any price The supply curve shows quantity supplied at any price A market equilibrium is a price at which quantity supplied is equal to quantity demanded

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4 1-Supply and Demand The demand curve is derived from consumers’ w-t-p. It shifts when w-t- p changes, f.ex. when income (present or expected), normal good (e Y >0): income ↑, demand ↑ (standard case) inferior good (e Y <0): income ↑, demand ↓ prices of related goods (B), substitutes (e AB >0): p B ↑, demand A ↑ complements (e AB <0): p B ↑, demand A expectations or preferences change. price A quantity A S D p* q* p* new q* new D’
5 1-Supply and Demand The supply curve is derived from producers’ costs. It shifts when cost changes, f.ex. when input prices, technology or expectations change. Remember: A decrease in supply shifts the supply curve left and up !

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