Week 2A

Week 2A - COMM/FRE 295 September 14, 2010 Week 2a Demand,...

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COMM/FRE 295 September 14, 2010 Week 2a Demand, Supply, Elasticity & Market Equilibrium
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Your to do list! • Textbook: – Read Sections 2.5 – 2.6, 3.1 in the text • Read Week 2 newspaper articles (see links on class webpage titled “links to newspaper articles” in the Week 2 Folder)
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Topics Examined • Determinants of demand, analysis of demand schedules • Demand terminology; e.g., substitutes, complements, necessity, luxury, etc. • Detailed analysis of demand elasticity • Brief overview of supply schedules • Market equilibrium
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Overview of Demand A negative relationship typically exists between the price of a good and the amount demanded of that good Why must the price of wild salmon decline if the intent is to sell the above normal summer catch? Demand increases if the price of a substitute increases, if the product is promoted, or if consumer income rises Demand decreases if a fad ends, if negative information about product is released (e.g., health risk) or the number of consumers decreases Canadian 2004 per capital consumption of blueberries was 1.1kg, which was up 52% from 2002. Why? Would you like to be a pork producer when news of “swine flu” first emerged? Why or why not?
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Maple Leaf Share Price. What happened in Sept. 2008 to cause large volume and sharp price drop?
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British Columbia is the First Region in Canada to Implement a Carbon Tax Advocates of a carbon tax believe that if gasoline is made more expensive because of the tax people will: Supply some answers Rural BC is strongly opposed to the carbon tax because as compared to the Lower Mainland, they believe their demand for gasoline and heating fuel is much less elastic. Explain this logic What types of new jobs might be created as a result of higher carbon taxes in the future? Supply some answers
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e.g., A Shop’s Demand Function for Mountain Bikes Q = 600 - 0.1P +0.001Y + 0.05P o Q = number of bikes demanded P = own price of bikes Y = per capita disposable income P o = average price of mountain bikes at competitor’s shops The “600” term contains everything else such as advertising expense, weather, etc.
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Predicting Sales Quantities Q = 600 - 0.1P + 0.001Y + 0.05P o • Economists estimate the “coefficients” (i.e., 600, .1, .001 and .05) • Manager can play “what if” by inserting values for the “explanatory” variables e.g., P=1000, Y=50,000, P 0 =800 Q = 600-100+50+40 = 590 units
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Marginal Changes Q = 600 - 0.1P + 0.001Y + 0.05P o – a $10 increase in price decreases quantity demanded by 1 bike per year – a $1000 increase in income increases quantity demanded by 1 bike per year – a $60 increase in price of competing bikes increases quantity demanded by 3 bikes per year • Calculus: dQ/dP = -0.1 The -0.1 is a constant so demand slope is constant Therefore, dQ/dP = -0.1 is same as ΔQ = -0.1ΔP (Δ means “change in”) Predict ΔQ when ΔP = $10
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Example Q = 600 - 0.1P + 0.001Y + 0.05P o – Suppose manager raises price by $50 dollars at the same time consumer income rises by $1000 and competitor lowers price by $25
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Week 2A - COMM/FRE 295 September 14, 2010 Week 2a Demand,...

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