L3 - EC 1 UCLA Dr. Bresnock Lecture 3 Market An institution...

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EC 1 UCLA Dr. Bresnock Lecture 3 Market – An institution or mechanism that brings buyers (aka demanders, consumers), and sellers (aka suppliers, producers, firms, farms, fishermen, etc.) of particular resources together. This section will develop the building blocks of a market. To keep things simple initially, the market is assumed to consist of a large number of buyers and sellers, i.e. the wheat market. We will study less competitive markets at a later time. Demand schedule that shows the quantities that consumers are willing and able to purchase at each alternative price, at a specific point in time. Law of Demand there exists an inverse relationship between price (P) and quantity demanded (Q D ). Thus, if the P of a good falls, the Q D of the good rises and vice versa. Graph 1 An Ordinary Downward Sloping Demand Function Why is Demand Downward Sloping? 1) Simple Reasoning – people would like to buy more units at lower prices and vice versa. Sort of a bargaining instinct, or an observed response to “sales” or “discounts”. 2) Diminishing Marginal Utility (DMU) – the consumer gets less and less additional satisfaction from consuming equal additional units of the same good. Thus, consumers will purchase additional units only if the price fall.
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EC 1 Lecture 3 Dr. Bresnock 2 3) Substitution Effect – if the price of one good falls relative to its substitutes, then consumers will buy more of it. Consumers will purchase more units of the good that is relatively cheaper. 4) Income Effect – as the price of a good falls, the consumer can afford more units of that good (and/or other goods). This is because as price for the good falls, the consumer’s “real” income, or purchasing power, increases and vice versa. The consumer’s “money” income is the “take-home pay” or “budget” that the consumer has. How much quantity the consumer can “get”, or purchase, with that “money” income is the consumer’s “real” income. Graph 2 Illustration of the Income Effect What causes “Quantity Demanded” (Q D ) to change? PRICE (of the good itself). For example, if the price of wheat falls, then the quantity of wheat demanded will rise and vice versa. If the price of jellybeans rises, then the quantity of jellybeans will fall and vice versa. Changes in price will be shown as movements along one D-Curve . (See Graph 2 above, or Graph 1 on the last page). “Ceteris “Paribus Assumptions for Demand For one Demand Curve (D-Curve) all things other than Price (of the good itself) remain the same, or are held constant. For example, a particular demand curve for wheat is constructed with consumer income, prices of other related goods, i.e. corn, butter, etc. held constant. What causes “Demand” (D) to change?
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L3 - EC 1 UCLA Dr. Bresnock Lecture 3 Market An institution...

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