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Lecture01

# Lecture01 - Lecture 1 Supply and Demand Perlo Chapter 2...

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Lecture 1: Supply and Demand Perlo/ Chapter 2 Vladimir Petkov VUW 01 March 2010 Vladimir Petkov (VUW) Lecture 1: Supply and Demand 01 March 2010 1 ± 26

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Demand The quantity demanded is the amount that consumers are willing to buy at a given price during , holding constant the other factors Factors that can a/ect demand (kept constant when plotting a demand curve). Consumer tastes Information . For example, new info may be revealed that some products are healthy, etc. Prices of related goods . Consume more of the good if the price of a close substitute increases; consume less if the price of a complementary good increases. Income. An increase in income will can to more purchases (if the good is normal ) or fewer purchases (if the good is inferior ). Government rules and regulations. Taxes, for example, may change the e/ective price that consumers pay. Note that the quantity demanded can be higher or lower than the quantity sold (they are equal only in equilibrium). Vladimir Petkov (VUW) Lecture 1: Supply and Demand 01 March 2010 2 ± 26
The Demand Function The demand function is a mathematical representation of the relationship between the quantity demanded of a good, its price, and Q = D ( p , p s , p c , Y ) . Here p is the price per unit, p s is the price of a substitute good, p c is the price of a complementary good and Y is income. For example, the estimated demand function for pork consumption in Canada is Q = 171 20 p + 20 p b + 3 p c + 2 Y , where p b and p c are the prices of beef and chicken (substitutes). Usually we are interested in the relationship between the quantity demanded of a good and its price, so we ±x the other variables. In the above example, we could set p b = 4, p c = 3.33 and Y = 12.5 . This will give us Q = D ( p ) = 286 20 p . Vladimir Petkov (VUW) Lecture 1: Supply and Demand 01 March 2010 3 / 26

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The Demand Curve We can show the relationship Q = D ( p ) = 286 20 p graphically. Note that we plot the dependent variable ( Q ) on the horizontal axis and the independent variable ( p ) on the vertical axis! Vladimir Petkov (VUW) Lecture 1: Supply and Demand 01 March 2010 4 / 26
The E/ect of a Change in Price on Demand In the above example, if we increase the price form \$3.30 to \$4.30 , the quantity demanded decreases by 20 units (from 220 to 200). A change in price ( ceteris paribus ) translates into a movement along the demand curve. The demand curve is usually downward sloping: if price goes up, quantity demanded falls! This is known as the law of demand . However, some goods have upward-sloping demand curves. They are known as Gi/en goods . In our example,

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Lecture01 - Lecture 1 Supply and Demand Perlo Chapter 2...

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