Chapter 3

Chapter 3 - Chapter 3: Supply and Demand Supply and Demand...

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Chapter 3: Supply and Demand Supply and Demand Those who got it, and those who want it In a world constrained by scarcity, driven by utility seekers, there comes into being the interaction between those who want, and those who have to offer. The ensuing behavior creates the phenomenon know as a “Market” The Basic Concept The two sided nature of transaction, featuring an exchange between demanders and suppliers, underlies all trade and economic activity, today and since the dawn of intelligent man Demand Those who want, and are allocating their own scarce resources to attend, demand This observed behavior has precise meaning in economics, and refers to the following 3 points 1.) The willingness and ability of buyers to seek different quantities of goods 2.) at different prices 3.) and within a specific period of time Those who want, but are unwilling or unable to part with resources, are not considered demanders o The 15 year old, who, in anticipation of getting a drivers license, reads car magazines and longs for a Ferrari, is not a demander o The 50 year old mid-life crisis divorcée, who sells the family vacation home and goes shopping for a car to pick up girls half his age, is a demander If a given good is known to provide utility, and is known to be the object of demanders, who seek the utility offered, then it stands to reason the following: o The quantity demanded will be higher when the price is lower Law of Demand - The price of a good, and the quantity demanded are inversely related, all things equal. This may be expressed in one of four ways 1.) words: the definition 2.) symbols: P↑ Q D ↓; P↓ Q D P=price Q D =Quantity Demanded 3.) demand schedule 4.) demand curve
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Price: Absolute vs. Relative: Absolute Prices are reflected in monetary terms o Shirts cost $10, Pant $30 Relative Prices are given in terms of another good o Shirts/Pants= $10/$30 = 1/3 Consider each and their implications on behavior Demand The factors are at work within the Law of Demand and the inverse relationship between price and demand 1.) Lower priced goods are substituted for goods whose prices rise o Consumers may exercise choice, and are free to select other goods offering greater perceived value 2.) Law of Diminishing Marginal Utility: With each unit of a good consumed, the marginal (or additional) utility gained declines, within a given time o Which offers the most utility: The first bottle of water or the 10 th ? The first hour of study, or the fifth? Explained a different way, with every unit consumed, the benefit derived from each subsequent unit is less than the unit consumed right before o So then, what would be most valuable, the first piece of pizza, or the eight? Therefore, if the first consumed is most valuable, and the last the least valuable, then the same good in a
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This note was uploaded on 11/03/2009 for the course ECON 2000 taught by Professor Roussell during the Fall '06 term at LSU.

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Chapter 3 - Chapter 3: Supply and Demand Supply and Demand...

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