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Week 2 Lecture - ECON1001 Week 2 Demand and Supply The...

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ECON1001 Week 2 Demand and Supply
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2 The Story So Far… The PPF and economic efficiency Gains from specialisation and trade Price splits the gains from trade With few parties, price determined through negotiation With many parties price determined in a market Supply and Demand
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3 Topic Outline Explain the main influences on demand Explain the main influences on supply Show how prices and quantities are determined by demand and supply Make predictions about price and quantity changes using the demand and supply model
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4 Demand The quantity demanded of a good or service is the amount that consumers plan to buy in a given period at a particular price. If a person “demands” something, they Want it, Can afford it, and Have made a definite plan to buy it.
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5 Demand Determinants What determines buying plans? The price of the good The prices of related goods Substitutes, Complements Income Normal goods, Inferior goods Expected future prices Preferences Population
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6 Demand The Law of Demand Other things being equal , the higher the price of a good, the lower is the quantity demanded. Reasons for the Law of Demand Substitution effect price rise increases its relative price Income effect cannot afford to buy as much of everything as before rise in price
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7 Jerry’s Demand for Ice Cream Price Quantity $0.00 12 $0.50 10 $1.00 8 $1.50 6 $2.00 4 $2.50 2 $3.00 0
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8 Catherine’s Ice Cream Demand Price Quantity 3.00 1.50 6 12 (Inverse) Demand curve P = f(Q) can be written: P = 3 – 0.25Q, Or in terms of Q = f(P): Q = 12 – 4P
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9 Market Demand Market demand - individual demand curves summed horizontally . It shows how total quantity demanded varies with price of the good Like individual curves, market demand holds everything constant but the price of the relevant good
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10 Market Demand for Ice Cream Price Jerry George Market $0.00 12 7 19 $0.50 10 6 16 $1.00 8 5 13 $1.50 6 4 10 $2.00 4 3 7 $2.50 2 2 4 $3.00 0 1 1 $3.50 0 0 0
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11 Market Demand for Ice Cream Price Quantity 3.00 1.50 6 12 7 1 2.00 D J D G 19 D M Market demand is the horizontal sum of all individual demands Here: D M = D J + D G More generally: D M = Σ D i 3.50
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12 Algebraically Jerry: P = 3 – 0.25Q J , or Q J = 12 – 4P George: P = 3.5 – 0.5Q J , or Q G = 7 – 2P Market: Q M = Q J + Q G = (12 – 4P) + (7 – 2P) Therefore, Q M = 19 – 6P, for P ≤ 3.00 Q M = 7 – 2P, for P ≥ 3.00
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13 Another Example Identical consumers Suppose there are 100 people with identical demand curves given: Q i = 10 – P, for i = 1, …, 100 What is the market demand curve?
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