9.03.08 - ECONOMICS 1 Professor Kenneth Train 9/3/08...

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ECONOMICS 1 Professor Kenneth Train 9/3/08 Lecture 2 ASUC Lecture Notes Online is the only authorized note-taking service at UC Berkeley. Do not share, copy or illegally distribute (electronically or otherwise) these notes. Our student-run program depends on your individual subscription for its continued existence. These notes are copyrighted by the University of California and are for your personal use only. D O N O T C O P Y Sharing or copying these notes is illegal and could end note taking for this course. LECTURE DEMAND AND SUPPLY Today, we are going to talk about demand and supply, one of the most common concepts on the street and an astonishingly powerful and useful abstraction of how markets react to various changes. It is necessarily theoretical, but will capture the realities of situations. It is very important and also very subtle. The demand and supply of salmon will be the ongoing example for today. You may think this is silly but the politics and economics of fish is important; there have been tremendous policy oriented towards salmon because it was being over- fished. In this case, there was an over-demand of a scarce resource. DEMAND What is demand? To think of demand you necessarily involve yourself in a hypothetical question. You should be asking yourself, if the price was something, how much would people want to buy? Then you can think of this question at all different prices. Suppose that at $8 per pound, consumers are willing to buy 12,000 pounds of salmon. If you lower the price to $6 per pound and ask the same question, more people are willing to buy it because the salmon is now cheaper and a better substitute for other foods, so people are willing to buy 18,000 pounds. At $4, people are willing to buy 24,000 pounds so you get an even higher number. We are not saying that the price is at any of these levels; we are examining what would happen if the price was at any of these levels. Price Quantity demanded $8 12,000 $6 18,000 $4 24,000 Here is a hypothetical question; if the price were $8 per pound, how much would people buy? There is some quantity that people would buy at this price level. You can chart these combinations of price and quantity for salmon. Put price on the vertical axis and quantity on the horizontal. Graph these points, 12,000 pounds for $8 per pound, 18,000 pounds for $6 per pound, $4 for 24,000 pounds, etc. You can do this theoretically for every single possible point. Connecting these points will give you a line or a curve. This line that connects these points is called a Demand Curve. By definition, it is the quantity consumers buy at each given price. Why is it backwards from the way you normally do it when you are graphing a function? In two weeks from now I’ll show you why we do this and how it facilitates welfare analysis. I have drawn it downward sloping because as you lower the price the quantity people buy increases. Price and quantity move in opposite directions (inversely proportional).
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9.03.08 - ECONOMICS 1 Professor Kenneth Train 9/3/08...

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