Lecture 3 DemandSupply Equilibrium

Lecture 3 DemandSupply Equilibrium - Other Big Questions...

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1 1 Demand and Supply 2 Other Big Questions 1. What goods and services should be produced? 2. How should we produce them? 3. Who should get them? All societal systems need to find answers to these questions. 3 Different Forms of Economic Organization 1. Command economies 2. Cooperative economies 3. Individualistic economies 4 •F i rm
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2 5 Diagram of the Economy spending income land, labor, capital wage, profit, rent revenue goods, services goods, services land, labor, capital 6 Nominal Price • Nominal price : the number of dollars that must be given up in exchange for a good or service. – Does not tell you how much you value an object. – Example: Price of a can of coke – Do we value coke more now than we used to? $1 2005 5 cents 1950 7 Real Price • Real price : the dollar price of a good relative to the average dollar price of all other goods. – Example: suppose there are only 2 goods dollar price of coke=$1 dollar price of chips=$2 real price of coke=1/2 – So real prices, tell us how much of all other goods and services we have to give up to make a given purchase. 8 Demand • You demand something if –You wan t
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3 9 Demand • Quantity demanded : the amount consumers demand at a particular price. • Demand : the entire relationship between price and quantity demanded. • The Law of Demand : All else equal, the higher is the price of a good, the smaller is the quantity demanded. 10 The Corrupt Professor Quantity Price 11 Why Do Price Changes Affect Consumption • The substitution effect : the change in the quantity demanded of a good that results from buyers substituting into other goods when the price of that
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Lecture 3 DemandSupply Equilibrium - Other Big Questions...

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