chap2_302-sp11 - Chapter 2 Supply & Demand 1 Supply and...

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1 Chapter 2 Supply & Demand
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2 market of a good or service. markets are not necessarily confined to a  single specific time and location.  Extent   of the market depends on how the  good is defined. Market for “frozen dinners” is different from  that for “high-priced ethnic entrees”. Supply and demand analysis
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3 Characteristics of “goods” The  same  goods are classified as  different products  if they differ only with  respect to the times or places they are  available. An umbrella on a sunny day is a very different  product from an umbrella during a downpour.
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4 “Real” versus “nominal” price Nominal price:  How much you pay in dollars to get a unit  of the good. Real price:  how much of other goods you could have  bought with the money you spend for buying a unit of the  good: To get a unit of the good how much of the other  goods you have to give up. In a word with two goods  X Y , real price of good  X  is  P X  / P Y In a world with many goods, real price of good  X  is its  nominal price divided by an aggregate measure of  prices (for example Consumer Price Index). The real  price is the  Price adjusted for inflation. What affects behavior is the change in real price.
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5 Law of demand Law of demand :  The empirical observation that when the  ( real ) price of a product rises, people demand smaller  quantities of it. Substitution effect:  This is the effect just due to change in  real price (any income effect is assumed to be compensated  for)    People switch to cheaper close substitute.  Substitution effect  always  moves opposite to the direction of  the price change. Income effect    As price increases  Nominal   income  remains the same but  real   income goes down. People buy less of a  NORMAL  good as their real income  goes down. However, for  INFERIOR  goods people buy  become poorer. 
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6 Demand schedule Demand schedule  is the set of price-quantity pairs  for which consumers are “satisfied”, i.e. it gives the  quantity that consumers want to buy, given the  price they face. S/unit Unit/Time S/unit Unit/Time P0 P1 P0 P1 Q0 Q0 Q1 Q1 Normal Good Inferior Good Substitution Income
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7 Law of supply Law of supply :  The empirical observation that when the  (real) price of a product rises, firms offer more of it. This  happens for two reason: Existing suppliers increase their production (why?): the cost of producing additional units often tends to rise  as more units are produced (the supply curve represents 
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chap2_302-sp11 - Chapter 2 Supply & Demand 1 Supply and...

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