chp2 - ECON 300B Lei Intermediate Microeconomics Winter...

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Unformatted text preview: ECON 300B Lei Intermediate Microeconomics Winter 2011 1 Chapter 2 Chapter 2 Chapter 2 Chapter 2 - Supply and Demand Supply and Demand Supply and Demand Supply and Demand 2.1 Demand 2.1 Demand 2.1 Demand 2.1 Demand Determinants of demand Determinants of demand Determinants of demand Determinants of demand i. Price of the good 1 ii. Tastes iii. Information iv. Prices of related goods (complements and substitutes) v. Income (normal and inferior goods) vi. Government rules and regulations vii. Others A demand function demand function demand function demand function relates the quantity demanded of a good (the explained variable) to the determinants of demand (the explanatory variable): Q d = D(determinants of demand) Assumption Assumption Assumption Assumption There are many determinants of demand in real life. Some of them are not observable or cannot be quantified. By making assumptions, the demand function can be simplified. Once a simplified economic model is learned, we can always relax the assumptions and study a harder but more realistic model later. Example Example Example Example Suppose the estimated demand function for apples is: Q d = 63 ¡10p + 2p orange- 3p pie crust + 5Y Assuming other factors are constant at p orange = $1, p pie crust = $5 and Y = $10, the demand function simplifies to: _____________________________________________ Law of demand Law of demand Law of demand Law of demand Holding other factors constant (“ ceteris paribus ”), the amount of a good the consumers are willing to are willing to are willing to are willing to (not actually ) buy is inversely related to the good’s price In other words, Q d is _____________________ function in p . Example Example Example Example From the simplified demand function for apples, we know that gG ¡ g¢ = ______________ By convention , _____________________ is assigned to the horizontal axis and _______ _____________________ is assigned to the vertical axis. Thus, the demand curve demand curve demand curve demand curve plots the inverse demand function inverse demand function inverse demand function inverse demand function: £ = ¤ ¥¦ (§ ¨ ) . 1 The word “good” refers to both tangible goods and intangible services. ECON 300B Lei Intermediate Microeconomics Winter 2011 2 Example Example Example Example The inverse demand function for apples is: g G = 100 − 10¡ 10¡ = 100 − g G ¡ = 10 − 0.1g G so the demand curve for apples is linear with a vertical intercept of 10, a slope of - 0.1 (downward-sloping) and a horizontal intercept of 100 – 10(0) = 100. Plot the demand curve for apples: What will happen in the graph if the price of apples drops from $1.5 to $1? At p = $1.5 , Q d = _____________________ At p = $1 , Q d = _____________________ Indicate the change of price of apples in your graph above....
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This note was uploaded on 03/22/2011 for the course ECON 300 taught by Professor Juzwiak,william during the Spring '07 term at University of Washington.

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chp2 - ECON 300B Lei Intermediate Microeconomics Winter...

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