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Econ25200F10Mtg4

# Econ25200F10Mtg4 - Econ 25200 4th Class Demand and Supply...

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Econ 25200 – 4 th Class Demand and Supply And Market Efficiency (1)

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Issues How to use demand and supply? Theorems associated with ideal markets? Market interventions? Blind spots, salience biases, etc.?
Demand Curve Gives the amount of quantity demanded of a good, for any given price of that good E.g., Q D = 56 – 4P D where Q D = quantity demanded by buyer and P D = price paid by buyers

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Demand Curve Mapping from price to quantity demanded At any price, tells us desired quantity demanded Buyer acts as “price-taker,” does not try to influence price in any way
Demand Curve P D Q D 14 56 0 7 28 Q D = 56 - 4P D

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Demand Curve Choke price: price at which quantity demanded is zero Q D = 56 – 4P D = 0 => P D = 14 Satiation demand: quantity demanded when good is free Q D = 56 – 4P D = 56 when P D = 0
Demand Curve Slope of demand curve: Given Q D = 56 – 4P D ∆Q D /∆P D = - 4 Note: since quantity is on horizontal axis, this is slope relative to vertical axis

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Demand Curve P D Q D 14 56 0 - 1/4 - 4 Q D = 56 – 4P D
Demand Curve Negative slope says as price for buyers increases , quantity demanded moves in opposite direction, and amount demanded decreases Larger slope (in absolute value) means more price responsive [for given units of both price and quantity]

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Marginal (Private) Benefit Marginal (private) benefit (MPB) to buyer of a specific unit is value of that additional unit to buyer is maximal price buyer is willing to pay for that unit is price coordinate of demand curve for that quantity
Inverse Demand Curve Expresses price as function of quantity If Q D = 56 – 4P D , then inverse demand curve is P D = 14 – (1/4)Q D So, MPB = 14 – (1/4)Q D If Q D = 28, then MPB = 14 – (1/4)28 = 7

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MPB and Price If MPB of 28 th unit = 7, then rational buyer will be
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