ec-12 - Qd ii Price Qd b Exceptions i Gold ii Status goods...

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9/16 I. Supply and Demand Model a. Definition i. Demonstrates how a decentralized choice mechanism resolves problem of scarcity 1. Wants > resources a. Demand > supply II. Demand a. Assume i. Many buyers ii. Rationality 1. Know preferences 2. Make choices b. Definition i. Demand (d) 1. A schedule of the quantities of a good that will be purchased at various prices over some period, other things constant ii. 5 parts to definition 1. Schedule (function) 2. Quantities that will be bought 3. Prices 4. Time period 5. Ceteris paribus (all things equal)
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iii. What demand isn’t 1. Not a quantity 2. Not a psychological construct 3. Not what we would like to have 4. Not what we can afford c. Example i. Joe cool’s D schedule for CDs Price Per CD Q Per Month 16 1 15 2 14 3 13 5 12 6 11 7 ii. The whole schedule is Joe’s Demand iii. Demand Curve iv. Market Demand 1. Sum of Qd at each price a. By all individuals in the market Joe Josefina P Qd Qd Mkt D 16 1 0 1 15 2 1 3 14 3 2 5 13 5 3 8 12 6 4 10 11 7 4 11
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III. Law of Demand a. Other things constant i. Price
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Unformatted text preview: Qd ii. Price Qd b. Exceptions i. Gold ii. Status goods c. Rationale i. Change in P causes change in pp cost to consume d. Example i. Bud Beer vs. Bell’s Beer 1. Bud: 1.00 2. Bell’s: 2.00 a. opportunity cost of bud: ½ bells b. opportunity cost of bell’s: 2 buds ii. Now suppose 1. P of bud: 1.00 2. P of bell’s: 1.50 a. opportunity cost of bud: 2/3 bells b. opportunity cost of bell’s: 3/2 buds 3. bell’s relatively cheaper a. Price of Bell’s Qd e. People respond to relative prices i. Substitution effect of price change 1. It’s a marginal effect a. All beer drinkers don’t change behavior ii. Who does? 1. Those at margin a. Bud drinkers with weaker preferences for bud switch iii. Given a price change 1. Buyers voluntarily sort themselves a. Those who keep consuming b. Those who switch 2. Preferences are revealed by behavior...
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ec-12 - Qd ii Price Qd b Exceptions i Gold ii Status goods...

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