7LectureS11

# 7LectureS11 - LECTURE 7 DEMAND, SUPPLY, AND THE PRICE...

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LECTURE 7 DEMAND, SUPPLY, AND THE PRICE SYSTEM Lecture 6 presented the concept of demand as a scientific subject of analysis, and we made assumptions that enabled us to begin the discussion of demand within the context of a specific market: the market for pizza in Tempe. We used casual empiricism to bound the demand for pizza per week in the Tempe pizza market and assumed that the average weekly demand by households amounted to 15,000 pizzas per week, at an average price of \$10 per pizza. FACTORS THAT AFFECT DEMAND Assuming that the average level of sales of pizza in our market is 15,000 pizzas per week, what are some things that, if they changed, would change the demand for pizzas in our market as measured by the number sold per week? Let’s make a list. 1. THE PRICE OF PIZZA We will jump ahead to the conclusion that we are setting out to demonstrate: If the price of pizzas rises from \$10 each to \$20 each, a smaller number than 15,000 per week will be demanded and purchased. If the price of pizzas falls from \$10 each to \$5 each, a larger number than 15,000 per week will be demanded and purchased. We call this the “own price” of pizza, that is, the price of pizza “its ownself.” (See #3 and #4 below.) 2. INCOME It is costly to dine out, compared with preparing meals within the household. If the average income of the households in our market that have a demand for pizza increases, the number of pizzas demanded per week will increase. If the average income of the households in our market that have a demand for pizza decreases (as in the Great Depression, when 25 percent of the labor force was unemployed, without pay) the number of pizzas demanded per week will decrease. 3. THE PRICE OF SUBSTITUTES Some economic goods are substitutes for each other, with respect to consumers. We can either spread butter or margarine on our bread. We can drink tea or coffee with breakfast. We can drink water or a soft-drink with our lunch. We can eat a pizza or a subway sandwich for dinner. If the price of a substitute (sub sandwich) falls, we will demand more of the substitute, and the demand for pizzas, the “good in question” will decrease. In other words, if we are in our market looking to

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purchase a pizza for dinner, and see that Subway is having a “two-for-one sale” (a fall in the price of sub sandwiches), if we decide to not get the pizza and purchase the sub sandwiches, the fall in the price of a substitute decreased the demand for the good in question, pizza. 4. THE PRICE OF COMPLEMENTS Some economic goods are complements for each other, with respect to consumers. These are goods that we use together. Bread and butter are complements. Bread and margarine are complements. Golf clubs and golf balls are complements. DVD players and DVDs are complements.
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## This note was uploaded on 03/23/2011 for the course ECN 212 taught by Professor Nancy during the Spring '07 term at ASU.

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7LectureS11 - LECTURE 7 DEMAND, SUPPLY, AND THE PRICE...

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