kf003 - SupplyandDemand KafuWong 1 MarketsandPrices (an...

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1 Ka-fu Wong University of Hong Kong Supply and Demand
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2 Markets and Prices Why does Ming YAO earn more than Ka-fu WONG (an  award winning teacher)?
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3 Markets and Prices Why do diamonds cost more than water?  
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4 Markets and Prices Why do Picasso’s paintings sell for more than Leroy  Nieman’s? 
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5 Markets and Prices Why do the crabs of QiBaiShi’s ( ) sell for more  than the real ones? 
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6 Markets and Prices Is it cost of production  that determines prices  (as Adam Smith  thought)?
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7 Markets and Prices Or is it willingness to pay  that determines prices (as  Stanley Jevons thought)? 
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8 Markets and Prices Alfred Marshall ( Principles  of Economics , 1890) was  the first to explain clearly  how both costs and  willingness to pay interact  to determine market  prices. 
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9 Markets and Prices The  market  for any good or service  consists of all (actual or potential)  buyers or sellers of that good or  service. Additional fun reading: http://www.squidoo.com/chinese-wet-market
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10 The market for lobsters The market for lobsters in Portland, Maine, on July 20,  2004.
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11 The demand for lobsters The demand curve is the set of all price-quantity pairs  for which buyers are satisfied.    ("Satisfied" means being  able to buy the amount they want to at any given price.) Price ($/lobster) Quantity (1000s of lobsters/day) 10 8 6 4 2 0 1 2 3 4 5 D D
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12 Horizontal  interpretation of the demand curve If buyers face a price of $4/lobster,  together  they will  wish to purchase 4000 lobsters a day. Price ($/lobster) Quantity (1000s of lobsters/day) 10 8 6 4 2 0 1 2 3 4 5 D D
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13 Vertical  interpretation of the demand curve If buyers are currently buying 4000 lobsters a day, the  demand curve tells us that the “ marginal ” buyer would  be willing to pay at most $4 for one additional lobster. Price ($/lobster) Quantity (1000s of lobsters/day) 10 8 6 4 2 0 1 2 3 4 5 D D
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14 Demand curves slope downward for two  reasons 1. As the good becomes more expensive, people switch  to substitutes.  ( Substitution effect ) The Substitution Effect is the change in the quantity  demanded of a good that results because buyers switch to  substitutes when the price of the good changes 1. As the good becomes more expensive, people can’t  afford to buy as much of it. ( Income effect Income effect is the change in the quantity demanded of a  good that results because a change in the price of a good  changes the buyer’s purchasing power
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15 The supply of lobsters The supply curve is the set of price-quantity pairs for  which sellers are satisfied.  ("Satisfied" means being  able to sell the amount they want to at any given price.) Price ($/lobster) Quantity (1000s of lobsters/day) 10 8 6 4 2 0 S S 1 2 3 4 5 6
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kf003 - SupplyandDemand KafuWong 1 MarketsandPrices (an...

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