Lecture 2 _Jan 21_ - Economics 100A Lecture #2: Thursday,...

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1 Economics 100A Lecture #2: Thursday, Jan. 21 Review of Supply & Demand
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2 The Supply and Demand Model You should know (and love) the S&D model from Principles Describes how consumers and producers interact in a Most widely-used model and it is testable Builds up demand from individual consumption decisions Builds up supply from firms’ production decisions And then brings both together in market equilibrium
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3 Demand curve Demand is the quantity that consumers together are willing to buy at each price . Determinants of demand: D(p; p S ,p C ,I, X) Tastes of consumers (not explicit in the function) Prices of substitutes and complements (p S , p C ) Income level and distribution among consumers (I) Information ( e.g ., health effects of the good) Environmental factors ( e.g., weather) Government intervention ( e.g., use restrictions)
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4 Demand curve (cont’d) Relation between quantity and price: D(p) Odd convention: price is put on the vertical axis Kinds of demand Individual vs. market Brand vs. product category Direct vs. derived Law of Demand Demand curve downward sloping Actually not true theoretically or empirically, as we will see
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5 Price elasticity of demand Percentage change in quantity demanded in response to a 1% increase in price Arc elasticity formula Using Calculus: Use log rule: dlnf(x)/dx = (1/f(x))(df/dx) And use: ln(x 1 ) – ln(x 0 ) (x 1 -x 0 )/x 0 0 0 1 0 0 1 % % , P P P Q Q Q P Q P Q dP dQ Q P dP dQ Q P dP Q d dP P d dP Q d P d dP P d Q d P Q 1 1 ) ln( ) ln( ) ln( ) ln( ) ln( ) ln( 1 1 ,
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6 Properties of price elasticity A pure number (no units) otherwise cannot easily compare two different goods It is not the slope of the demand curve The “Law of Demand” Downward sloping demand, or ε Q,P < 0 Classifying elasticities “elastic” when:
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Lecture 2 _Jan 21_ - Economics 100A Lecture #2: Thursday,...

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