Ch 3-4 - Supply, demand and elasticity

Ch 3-4 - Supply, demand and elasticity - Ch 3-4 Supply,...

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Ch 3-4 Supply, demand and elasticity Olivier Giovannoni ECO 304K – Introduction to Microeconomics
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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 Ch. 3-4: Supply, demand and elasticity - 2 Ch 3. Supply and demand Ch 4. elasticity
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1. Markets and prices A market for a good or a service 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 Ch. 3-4: Supply, demand and elasticity - 3
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2. Demand Now we can define the supply (from sellers) and the demand (from buyers) on those competitive markets. “Demand” is what buyers want to buy, plan to buy, and can afford. So “demand” is the willingness-and-ability to pay. So 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 Ch. 3-4: Supply, demand and elasticity - 4
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2. Demand (. ..) ..) Why this negative relationship? Substitution effect: a (relative) price hike is an incentive to go for alternatives coke vs. pepsi I ncome effect: People tend to preserve their income: when the price of a commodity rises, you tend to buy less of it 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, HDTVs, etc… To each price corresponds a specific quantity demanded. The set of all prices and quantities demanded is called the demand schedule . Ch. 3-4: Supply, demand and elasticity - 5
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2. Demand (. ..) ..) price quantit y Demand curve: quantities bought as a function of the sales price, ceteris paribus (note that the price is reported on the vertical axis, for convenience) Important distinction: 1. The “quantity demanded” is only one point on the curve that corresponds to a specific price.
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Ch 3-4 - Supply, demand and elasticity - Ch 3-4 Supply,...

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