Section_Two_PPT_08 - SectionTwo DemandandSupply...

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Section Two Demand and Supply
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Let’s start with a look at demand Consider a product…for example,  coffee . in economics, we may want to study the  market for coffee. Let’s first look at consumers’ demand   for coffee.
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There are many things that effect how much  coffee is purchased…  Weather, season, trends, ages of consumers,  family status, prices of products that are  purchased to accompany coffee, prices of  products that are purchased instead of  coffee, convenience (coffee shop location,  maybe), we could go on and on. All of these things change and impact how  much coffee is purchased.  This makes our  study very complicated.
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Say, for example, we know that the price of  coffee has gone down, weather has gotten  colder, a new popular sitcom is set in a coffee  shop, Starbucks are opening across the  country, people are generally making more  money, and people are purchasing more and  more coffee. How do we know how much of the increase in  coffee sales is due to the change in price ?
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so to study the market for coffee more  easily, we need to simplify our analysis  by making an assumption. .. We make the very UNREALISTIC  assumption that  absolutely nothing in  the world ever changes except for  the price  of coffee. ..
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In other words… No one gets older. Prices of all other products never change. No one gets a raise. No one moves to a different location. No one changes jobs. etc. , etc., etc. All of these things are called  “fixed”  or  “constant.” This is the “ceteris parabis” assumption that  we discussed in unit one.
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This is often confusing for many  students.  It may help to think of it like  this: In a laboratory, a scientist may want to  know the impact of a particular fertilizer  on a particular plant.  
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He creates an experiment where he has two  identical plants.   He gives them the same amount of water,  sunlight, soil, etc.   The only thing that is different between them  is that one receives fertilizer and one does  not.  Every thing else is the same (everything  else is fixed).  Then he studies how the change in the  fertilizer affects the plant.
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Economists are also scientists, but they  study markets and people instead of  things in a lab.  We can’t bring people  into a lab and watch how they behave in  their purchasing life and expect the  behavior to be realistic.
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Instead, we pretend that we take a “snapshot  of the world.”  Kind of a “before” picture.  We  determine what world people are operating 
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Section_Two_PPT_08 - SectionTwo DemandandSupply...

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