110lec4 - ECON 110 ECON Introductory Introductory...

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Unformatted text preview: ECON 110 ECON Introductory Introductory Microeconomics Microeconomics Lecture 4 Spring, 2009 William Chow Highlights Highlights Demand and Quantity Demanded Factors affecting Demand Change in Demand and Change in Quantity Demanded Supply and Quantity Supplied Factors affecting Supply Change in Supply and Change in Quantity Supplied Demand and Supply Demand Some clarifications on misused concepts: We deal with Prices in terms of Relative Prices We distinguish between demand and quantity demanded, and between supply and quantity supplied Demand and Supply Demand Relative prices indicate the opportunity cost or buying an item Papple = $10 Relative Price of apple = 10/15 = 2/3 Porange = $15 i.e. the opportunity cost of apple = 2/3 orange Demand and Supply Demand The reason of using relative prices becomes obvious when there is an increase in both the prices of apples and oranges Then apples and oranges are more expensive in money terms, but not in terms of opportunity costs. Demand Demand Quantity Demanded: The amount consumers plan to buy at a particular price during a given time period Demand: The entire relationship between the price of the good and quantity demanded of the good Each price level corresponds to a unique quantity demanded Demand Demand A demand curve shows the relationship between the quantity demanded of a good and its price when all other influences on consumers’ planned purchases remain the same Law of Demand: Other things remaining the same, the higher the price of a good, the smaller is the quantity demanded Income Effect Income 1. 2. The reason for this negative relationship is two­fold: Income Effect and Substitution Effect To understand Income Effect, we need to define the following Substitute ­ a good that can be used in place of another good e.g. DVD­RW and CD­RW Complement ­ a good that is used in conjunction with another good e.g. DVD­RW and DVD­burner Income Effect Income Income effect — when the price of a good or service rises relative to income, people cannot afford all the things they previously bought, so the quantity demanded decreases As the price of CD­RW rises, ceteris paribus, the purchasing power of your income drops and you are worse off – you buy less of this item Substitution Effect Substitution Substitution Effect – when the price of a good rises, the relative price (opportunity cost) of a it rises as well and people seek substitutes for it. So the quantity demanded decreases So both the Income Effect and Substitution Effect works to bring down quantity demanded when there is a price increase Factor Affecting Demand Factor The own price of the good The prices of other goods: complements or subtitutes Expected future prices Income: normal or inferior goods Population Preferences The Demand Curve The Each point on the Demand curve states the maximum price consumers are willing to pay for a certain amount of the good It also measure the Marginal Benefit consumers derive from those units Change in Quantity Demanded Change Any changes in the amount of goods being desired as a result of a change in its own price is called a Change in Quantity Demanded It is represented by a movement (sliding along) the Demand curve Change in Demand Change When the amount of goods desired change as a result of changes in factors other than its own price, there is a Change in Demand The buying plan changes without changes in the price of the good – at the same price level, the quantity demanded of it changes The is represented by a shift in the entire Demand Curve Change in Demand Change A shift to the right indicates an increase in demand A shift to the left indicates a decrease in demand Change in prices of related goods goods Substitutes – the price change of a substitute has a positive effect on the demand for the good Complements – the price change of a complement has an opposite effect on the demand for the good Change in Income Change When income increases, consumers buy more of most goods and the demand curve shifts rightward A normal good is one for which demand increases as income increases An inferior good is a good for which demand decreases as income increases Factors Affecting Supply Factors The own price of the good The prices of resources needed to produce it The prices of related goods produced Expected future prices The number of suppliers Available technology Supply Supply The quantity supplied of a good or service is the amount that producers plan to sell during a given time period at a particular price Supply refers to the entire relationship between the quantity supplied and the price of a good Supply Supply The supply curve shows the relationship between the quantity supplied of a good and its price when all other influences on producers’ planned sales remain the same Each point on the supply curve shows the minimum price the producers are willing to take for a given amount of quantity supplied Supply Supply The Law of Supply: Other things remaining the same, the higher the price of a good, the greater is the quantity supplied The intuition is that the opportunity cost (and hence the Marginal Cost) of producing a good increases in quantity i.e. the more you produce, the higher the MC and the higher the price is needed to cover this added cost Change in Quantity Supplied Change Any changes in the amount of goods being supplied as a result of a change in its own price is called a Change in Quantity Supplied It is represented by a movement (sliding along) the Supply curve Change in Supply Change When any factor that influences selling plans other than the price of the good changes, there is a Change in Supply This is represented by a shift in the entire Supply curve An leftward shift signifies a decrease in supply, and a rightward shift an increase in supply Change in Supply Change We saw that there are various factors that can influence production/selling plans Advances in technology create new products and lower the cost of producing existing products, so they increase supply and shift the supply curve rightward A rise in the price of productive resources decreases supply and shifts the supply curve leftward Change in Supply Change A substitute in production for a good is another good that can be produced using the same resources. Goods are complements in production if they must be produced together The supply of a good increases and its supply curve shifts rightward if the price of a substitute in production falls or if the price of a complement in production rises ...
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