Econ103part02

Econ103part02 - Part 2 Markets Demand Supply and Elasticity...

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Part 2 Markets: Demand, Supply, and Elasticity What determines the price of a good or service and the quantity bought and sold? Demand and supply model of a market This simple model of a market assumes competitive conditions Distinguish between a demand side and a supply side of the market Together they determine the equilibrium price and quantity

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Demand Demand is the quantity of a good people will wish to purchase over a given time The quantity of a good a person will plan to purchase will depend on: - Preferences (tastes) - Price of the good - Prices of other goods - Expected future prices - Income In the aggregate, demand will also depend on: - Population and demographics
The Law of Demand Other things remaining the same, the higher the price of a good, the smaller is the quantity demanded Substitution effect—the effect of the change in relative price Income effect—the effect of the change in overall purchasing power

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Demand Function and Demand Curves Demand function—demand as a function of a number of variables Demand curve—demand as a function of price, everything else held constant What is held constant along a demand curve? Changes in the quantity demanded —movements along the demand curve
Changes in Quantity Demanded P Q P’ P P” Q’ Q Q” Decrease in quantity demanded Increase in quantity demanded Change in quantity demanded—a movement along the demand curve

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Demand Curves Can be linear or non-linear A linear demand curve P Q 20 30 P = 20 - 2/3Q P = a + bQ Where a is the P intercept and b is the slope variable and is negative
Demand Curves A demand curve is more usually written with Q as the dependent variable P Q 20 30 Q = a + bP Where a is the Q intercept and b is the inverse of the slope and is negative Q = 30 – 3/2P

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Changes in Demand Shift in a demand curve is a Change in Demand Change in tastes or preferences Change in the prices of other goods - substitutes - complements Changes in expected future prices Changes in income - normal goods - inferior goods Changes in population/demographics
An Increase in Demand An increase in demand—a rightward shift P Q D D’

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An Increase in Demand Price of a substitute rises Price of a complement falls Expected future price rises Income rises (normal good) or income falls (inferior good) Preferences move toward the good Population increases
A Decrease in Demand A decrease in demand—a leftward shift P Q D D’

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A Decrease in Demand Price of a substitute falls Price of a complement rises Expected future price falls Income falls (normal good) or income rises (inferior good) Preferences move away from the good Population falls.
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