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Unformatted text preview: Chapter 2: The Basics of Supply and Demand CHAPTER 2 THE BASICS OF SUPPLY AND DEMAND TEACHING NOTES This chapter reviews the basics of supply and demand that students should be familiar with from their introductory economics class. The instructor can choose to spend more or less time on this chapter depending on how much of a review the students require. This chapter departs from the standard treatment of supply and demand basics found in most other intermediate microeconomics textbooks by discussing some of the worlds most important markets (wheat, gasoline, and automobiles) and teaching students how to analyze these markets with the tools of supply and demand. The real-world applications of this theory can be enlightening for students. Some problems plague the understanding of supply and demand analysis. One of the most common sources of confusion is between movements along the demand curve and shifts in demand . Through a discussion of the ceteris paribus assumption, stress that when representing a demand function (either with a graph or an equation), all other variables are held constant. Movements along the demand curve occur only with changes in price . As the omitted factors change, the entire demand function shifts. It may also be helpful to present an example of a demand function that depends not only on the price of the good, but also on income and the price of other goods directly. This helps students understand that these other variables are actually in the demand function, and are merely lumped into the intercept term of the simple linear demand function. Example 2.9 includes an example of a demand and supply function which each depend on the price of a substitute good. Students may also find a review of how to solve two equations with two unknowns helpful. In general, it is a good idea at this point to decide on the level of math that you will use in the class. If you plan to use a lot of algebra and calculus it is a good idea to introduce and review it early on. To stress the quantitative aspects of the demand curve to students, make the distinction between quantity demanded as a function of price, Q = D(P), and the inverse demand function, where price is a function of the quantity demanded, P = D -1 ( Q ) . This may clarify the positioning of price on the Y- axis and quantity on the X-axis....
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This note was uploaded on 06/06/2011 for the course ECON 302 taught by Professor Avrin-rad during the Spring '09 term at University of Illinois, Urbana Champaign.
- Spring '09