chap3 - Chapter 3 SUPPLY AND DEMAND: AN INTRODUCTION 1...

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1 Chapter 3 SUPPLY AND DEMAND: AN INTRODUCTION
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2 Chapter 1: Limited resources and boundless needs imply that we have to make decisions regarding resource allocations. Chapter 2: Resource allocations often involve exchange of goods and services. Because people want to take advantage of comparative advantage and specialization. Chapter 3: How are resources allocated? Particularly: what should be produced? How should they be produced? To whom are they produced? This chapter answers these questions and examines the dominant mechanism through which exchanges occur: market.
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3 The Power of Market Think about the food system of NYC with 10 million resides. The system must determine what should be shipped to thousands of stores: millions of different food and drink items; The system must determine the right quantity of each item in each store; The system must determine how much each consumer should consumer each of the items It is extremely complex yet it works seamlessly for the most part. People are generally happy with the system. What is this system exactly? It is the market. Market forces dictates billions of billions of decisions involved in the whole process.
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4 Yet housing market is another story; Plagued with shortage of rental housing; dissatisfactions among renters (and landlords) are prevalent. Why the difference? NYC housing market is regulated by a complex administrative rules such as rent control and rent stabilization which limit free price adjustments The policy goal is to provide affordable housing for low income households but what are the consequences? Finder’s fee, excessive deposits, required furniture rental, substandard maintenance Seemingly chaotic market forces (in most cases) do a better job than a government agent in allocations
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5 Market and Prices Market: consists of all actual and potential buyers and sellers of a good or service The market for lobsters in Portland, Maine, on July 20, 2004
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6 Question: Why is a Toyota Camry more expensive than a Toyota Corolla?
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7 Why do Picasso’s paintings sell for more than Leroy Nieman’s? (boy with a pipe: 105 million in 2004)
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8 Why are diamonds more expensive than water?
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9 Is it cost of production that determines prices as Adam Smith (author of Wealth of Nations,1776) thought?
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10 Or is it willingness to pay/utility that determines prices as Stanley Jevons (author of the Theory of Political Economy:1867) thought?
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11 Alfred Marshall ( Principles of Economics , 1890) was the first to explain clearly how both costs and willingness to pay interact to determine market prices. Both demand and supply matter.
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12 Price ($/lobster) Quantity (1000s of lobsters/day) 10 8 6 4 2 0 1 2 3 4 5 D D The Demand Curve A schedule or graph showing the quantity of a good that buyers wish to buy at each price
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13 Demand curves slope downward for two reasons.
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chap3 - Chapter 3 SUPPLY AND DEMAND: AN INTRODUCTION 1...

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