session3demandsupplyandprice

session3demandsupplyandprice - SESSION 3 SESSION 3 3 Demand...

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Unformatted text preview: SESSION 3 SESSION 3 3 Demand, Supply and Price SESSION 3: Demand, Supply and Price SESSION 3: Demand, Supply and Price Perfectly Competitive Markets • The demand/supply model is one of the most important tools in economic analysis. • Explains how perfectly competitive markets operate. • A perfectly competitive market is a market with: • a very large number of buyers and sellers, • each seller produces the same standardized product, • no individual firm can affect the market price, • no individual buyer can “move” the market, • free entry and exit, • perfect information SESSION 3: Demand, Supply and Price SESSION 3: Demand, Supply and Price The Demand Curve • Consider a typical consumer. Her demand for a good – pizza, say – is determined by: • The price of the good, for example, the price of pizza • Her income • The price of substitute goods e.g. tacos or sandwiches • The price of complementary goods e.g. beer or soda • Her tastes and the impact of marketing on her tastes • Her expectations about future prices • A demand schedule is the relationship between the price of a good and the quantity that is demanded taking all other influences on demand as fixed – ceteris paribus. SESSION 3: Demand, Supply and Price SESSION 3: Demand, Supply and Price The Individual Demand Curve and the Law of Demand • A typical demand schedule might look like this: Table 3.1 Al’s Demand Schedule for Pizza Price Quantity of pizzas per month $2 13 4 10 6 7 8 4 10 1 SESSION 3: Demand, Supply and Price SESSION 3: Demand, Supply and Price The Individual Demand Curve and the Law of Demand • The demand curve is a graphical representation of the demand schedule. • LAW OF DEMAND: LAW OF DEMAND: The The higher the price, the higher the price, the smaller the quantity smaller the quantity demanded, ceteris paribus. demanded, ceteris paribus. • Negative relationship between price and quantity demanded. SESSION 3: Demand, Supply and Price SESSION 3: Demand, Supply and Price The Individual Demand Curve and the Law of Demand • Quantity demanded is the amount of a good an individual consumer or consumers as a group are willing to buy. • A change in quantity demanded is a change in the amount of a good demanded resulting from a change in the price of the good. • An increase in price causes a decrease in quantity demanded, and a movement upward along the individual’s demand curve. SESSION 3: Demand, Supply and Price SESSION 3: Demand, Supply and Price The Law of Demand • A reduction in the price of a good – say pizza – affects quantity demanded for two reasons: • Substitution effect • Consumers switch from consuming substitutes – tacos or subs because pizzas are now relatively cheaper....
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