Week2.DemandandSupply.2007

Week2.DemandandSupply.2007 - Week 2 Demand and Supply in a...

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Week 2: Demand and Supply in a Competitive Market What did we learn last week? - definition of economics - opportunity cost - production possibilities model - calculating opportunity cost on PPF - increasing costs - maximizing value function along PPF 1
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Agenda for this week: - Overview of the competitive market model - What is a market? - What is competition? - Demand - Supply - Equilibrium - Shifts in Demand and Supply: how they affect equilibrium 2
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Price $25 $60 $30 $50 Demand 100,000 Market for 4’ x 8’ sheets of ¾” plywood 350,000 300,000 Quantity Per month
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4 0 350,000 $25 $15 $23 $11 Supply Demand Price Quantity Per month 300,000 100,000 Market for 4’ x 8’ sheets of ¾” plywood
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Demand curve – behaviour of buyers Supply curve – behaviour of sellers Equilibrium occurs when the behaviour of buyers and sellers matches (the amount buyers want to buy matches the amount sellers want to sell) Price brings behaviours into equilibrium Demand has negative slope Supply has positive slope in SR (may be positive, zero or negative in LR) SR = now, before productive capacity changes 5
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What is a market? A set of institutional arrangements that bring buyers and sellers together to negotiate the terms for exchanging goods or services Good = tangible Service = intangible 6
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What is competition? (perfectly competitive market) 1. many buyers, many sellers (price takers) 2. product is homogeneous (little brand loyalty) 3. perfect information (no one is fooled) 4. freedom of entry and exit in LR (no barriers to entry or exit) Therefore, producers have no market power, and price is main form of competition. 7
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Demand Curve – negatively sloped (what does this mean?) Law of Demand Q D = 600,000 – 10,000P or P = 60 - .0001Q D (doesn’t have to be linear; could be Q D = 1000P -1 = 1000/P) 8
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Is Price the only factor that affects Demand? No, quantity demanded is a function of: Own price (P) – movement along demand curve 9
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Price of a substitute (P S ) – shift demand curve (butter/margarine) 10
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Price of a complement (P C ) – shift demand curve (popcorn/cola) 11
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Incomes of Consumers (I) – shift demand curve Normal good 12
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Inferior good 13
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Week2.DemandandSupply.2007 - Week 2 Demand and Supply in a...

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