Chap3 - Krugman and Wells Chapter 3 Steven J. Haider EC201...

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Krugman Krugman and Wells and Wells Chapter 3 Chapter 3 Steven J. Haider EC201 Spring 2010
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EC201-3-p2 Why do we start here? Why do we start here? This chapter introduces one of our central models: “perfect competition” or “supply and demand” or a “competitive market.” This chapter quickly lays out the pieces, so we can start to use the model. Later chapters will develop the pieces in more detail. The model is relatively easy and it works for a large number of markets The key assumption: there are a large number of suppliers (/demanders), so that any one supplier (/demander) cannot affect the price Suppliers and demanders are “price takers” Model probably works well for coffee Model probably works poorly for computer operating systems We will discuss the coffee market throughout this chapter, following the book
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EC201-3-p3 Key components Key components The Demand Curve Tells us how much consumers are willing to buy at each price D emand is d ownward sloping The Supply Curve Tells us how much a firm is willing to sell at each price S up ply is up ward sloping Shifting vs. moving along a curve Equilibrium The model’s prediction for the resulting price and quantity transacted in the market
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EC201-3-p4 Demand Demand Quantity demanded Refers to the amount demanded at one particular price Demand Answers the question “what is the quantity demanded at every price ?” Price changes is key to market outcomes, so we consider this from the start NOTE: text leaves off the underlined piece—I think it is an important addition to distinguish from “quantity demanded” NOTE: Quantity demanded vs. demand is an arbitrary, but very important, naming convention Two representations of demand Demand Schedule : table form Demand Curve : the graph of the demand schedule
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EC201-3-p5 Demand: example Demand: example Demand schedule is table Quantity demanded in 2006 at $2.00 is 8.5b pounds Demand in 2006 is dark blue curve
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EC201-3-p6 Demand: using the model Demand: using the model “Law of Demand” Quantity demand is higher when prices are lower other things equal , or demand curves slope downward This finding is so common we call it a “law” Shifts in demand Demand curve shows different quantities demanded for all prices, holding all else equal What might shift demand? Change in tastes, for example Movements along the demand curve If just price is changing (perhaps dropping because of excess supply), the demand curve doesn’t shift The demand curve already tells us the quantity demanded at every price When an economist says “demand for X changed”, we mean “the demand curve shifted”
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Demand: shifts Demand: shifts Fig 3-2: a shift in demand for coffee At every price, the quantity demand is greater in 2006 vs. 2002
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This note was uploaded on 05/18/2010 for the course ECONOMIC Ec 201 taught by Professor Haider during the Spring '10 term at MSU - Iligan Inst of Tech.

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Chap3 - Krugman and Wells Chapter 3 Steven J. Haider EC201...

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