Intermediate Microeconomics: A Modern Approach, Seventh Edition

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Unformatted text preview: Demand & Supply On Modeling Models may seem very simplistic at times - but many good models are. Proof of pudding is in how well the model stands up to empirical scrutiny. Two pitfalls to avoid: the fallacy of composition post hoc ergo propter hoc mistakes positive vs. normative analysis Supply and Demand The supply and demand model is a basic workhorse of economics. We will consider each of its pieces. Then, we will use it to answer some basic questions. Note: When employing supply and demand we are considering perfectly competitive markets. For now that simply means all buyers and sellers are assumed to be price takers. Demand Concepts The demand function for X: X D = f(P X , P s , P c , I, T&P, Pop) Where: X D = quantity demanded P X = Xs price P s = the price of substitutes P c = the price of complements I=income T&P=tastes and preferences Pop=population in market or market size The Demand Curve (Verbal) The demand curve, a.k.a. demand, describes the relation between a goods price and the maximum quantity that consumers are willing and able to buy at that price, ceteris paribus. Ceteris paribus means holding all the other demand function variables constant at some given level. The Demand Curve (Verbal) The Law of Demand states that the relationship between a goods price and the quantity demanded of that good is negative. Example: when the price of a good falls from 25 to 10 , the quantity demanded rises from 15 to 30 . This is referred to as a change in quantity demanded and in this case an increase in quantity demanded. Own-price changes cause movements along a given demand curve. Movements vs. Shifts A movement along the demand curve for X would be caused by a change in P x . A shift of the entire demand curve would be caused by a change in one of the ceteris paribus demand variables. This would be referred to as an increase or decrease in demand. Increase in Demand When demand increases, the quantity demanded by consumers increases at every price. Example: when demand increases, the quantity demanded at a price of 25 rises from 15 to 25 . Decrease in Demand When demand decreases, the quantity demanded by consumers falls at every price. Example: when demand decreases, the quantity demanded at a price of 25 falls from 15 to 10 . 10 The Demand Curve (Table) The quantity demanded is a declining function of the price, as the table to the right illustrates. Demand Curve Price Quantity Demanded 0 40 5 35 10 30 15 25 20 20 25 15 30 10 35 5 40 0 11 Increase in Demand When demand increases, the quantity demanded is greater at every price....
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demand&supply - Demand & Supply On Modeling...

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