Lecture_3_-_Demand_and_Supply[1]

Lecture_3_-_Demand_and_Supply[1] - Demand and Supply A...

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Demand and Supply A question that used to really bother economists was “why is water so cheap when diamonds are so expensive?” Water is used for all sorts of things. We use it to grow crops, to keep clean, to cook with. In fact, we need a certain amount of water every day just to stay alive. On the other hand, diamonds are mainly just used for ornamentation. So why are diamonds, which are not necessary for human life, so much more expensive than water, without which we would all die? We can answer that question with the model of supply and demand. Demand: Lets say the price of a chocolate bar was $1.00. The quantity demanded is the number of chocolate bars that consumers are willing to buy at that price. In our case lets assume that that is 7 million chocolate bars. Now lets say that the price of a chocolate bar rose to $2.00. We would expect that the number of chocolate bars that consumers were willing to buy would go down. Lets now assume that the number of chocolate bars consumers were willing to buy was 7 million. Then we would say that when chocolate bars cost $2.00, the quantity demanded is 6 million bars. A demand schedule is a table that shows a range of prices of a good or service, and the quantity demanded of that good or service at each specific price. This helps us get a sense of the relationship between the price of a good and the quantity demanded. For example, we can see if a small change is price has large or small effects on the changes in the quantity demanded. Table 1 shows a hypothetical demand schedule for chocolate. From the table we can see that if the price of a bar of chocolate is $8.00, then no one will buy any chocolate. If the price of a bar is $7.00, the 1 million people will buy a chocolate bar. If the price of a bar of chocolate is $6.00, 2 million people will buy a bar of chocolate. A demand curve, often just called demand , is a graphical representation of the demand schedule. The demand curve that corresponds to the above demand schedule is represented below: Table 1: Demand for chocolate Price per bar of chocolate (dollars) Quantity of chocolate (millions of bars) 8.00 0 7.00 1 6.00 2 5.00 3 4.00 4 3.00 5 2.00 6 1.00 7 0 8
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K. A. Kramer, © 2009 2 Again, we can see that at a price of $8.00 no chocolate is demanded. At a price of $7.00 1 million bars of chocolate as demanded and so on. Seeing a picture of the demand schedule makes it easier for economists to understand the relationship between the price and quantity demanded. Notice that the quantity demanded is on the x-axis, while the price is on the y-axis. This might seem weird, since we will talk about the price of a good determining the quantity demanded of a good. (If this doesn’t seem weird to you, don’t worry about it.) At the beginning of the 20 th century there was a big fight between British economists and French economists, and one of the results of the fight was this labeling convention for our graphs. It doesn’t have to make sense, it is just how it is
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Lecture_3_-_Demand_and_Supply[1] - Demand and Supply A...

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