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2-Econ 211 Handout 2 Fall 2009

# 2-Econ 211 Handout 2 Fall 2009 - Econ 211 Handout 2 Fall...

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Handout 2 Fall 2009 1 Econ 211 Handout 2 Fall 2009 Supply and Demand I. Supply and Demand Curves Figure 1 Supply and demand curves are essential tools to understand the markets. In Figure 1 above, we see that the supply curve is upwards sloping. It is a function of price p and other variables that we will denote by B . The demand curve is downward sloping and it is a function of p and other variables that we will denote by A . The point where they cross is denoted by ˆ p , ˆ Q is the point where supply is equal to demand. This is also referred to as the market equilibrium. The price ˆ p is often referred to as the market-clearing price. Q p S p , B ( ) S p , B ( ) D p , A ( ) ˆ p ˆ Q

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Handout 2 Fall 2009 2 II. Demand Curves Consider an individual then consumes three goods and has an income. The individual’s feasible set is given by I = p 1 Q 1 + p 2 Q 2 + p 1 Q 2 We would expect that the demand for any of the goods, say Good 1 is a function of the price of that good and the price of other goods. We would also expect that the demand for a good is a function of income. Finally, the demand for a good is a function other factors. For example, the demand for umbrellas depends on the weather. The demand for suntan oil also depends on the weather. The demand for gasoline depends on the kind of car you drive as well as the weather. We can write the demand of individual for good one as p 1 = D p 1 , p 2 , p 3 , I , A ( ) where A denotes such factors as weather and kind of car.
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