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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.?
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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
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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
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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
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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
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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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