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Lecture-09-08 - Lecture 3:Supply and Demand Chapter 4...

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Lecture 3:Supply and Demand Chapter 4
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THE MARKET FORCES OF SUPPLY AND DEMAND 2 Markets and Competition A market is a group of buyers and sellers of a particular product. A competitive market is one with many buyers and sellers, each has a negligible effect on price. In a perfectly competitive market: All goods exactly the same Buyers & sellers so numerous that no one can affect market price – each is a “ price taker In this chapter, we assume markets are perfectly competitive.
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THE MARKET FORCES OF SUPPLY AND DEMAND 3 Demand The quantity demanded of any good is the amount of the good that buyers are willing and able to purchase. Law of demand : the claim that the quantity demanded of a good falls when the price of the good rises, other things equal
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THE MARKET FORCES OF SUPPLY AND DEMAND 4 The Demand Schedule Demand schedule : a table that shows the relationship between the price of a good and the quantity demanded Example: Helen’s demand for lattes. Price of lattes Quantity of lattes demanded $0.00 16 1.00 14 2.00 12 3.00 10 4.00 8 5.00 6 6.00 4 Notice that Helen’s preferences obey the Law of Demand.
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THE MARKET FORCES OF SUPPLY AND DEMAND 5 $0.00 $1.00 $2.00 $3.00 $4.00 $5.00 $6.00 0 5 10 15 Price of Lattes Quantity of Lattes Helen’s Demand Schedule & Curve Price of lattes Quantity of lattes demanded $0.00 16 1.00 14 2.00 12 3.00 10 4.00 8 5.00 6 6.00 4
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Market Demand versus Individual Demand The quantity demanded in the market is the sum of the quantities demanded by all buyers at each price. Suppose Helen and Ken are the only two buyers in the Latte market. ( Q d = quantity demanded) 4 6 8 10 12 14 16 Helen’s Q d 2 3 4 5 6 7 8 Ken’s Q d + + + + = = = = 6 9 12 15 + = 18 + = 21 + = 24 Market Q d $0.00 6.00 5.00 4.00 3.00 2.00 1.00 Price 6
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THE MARKET FORCES OF SUPPLY AND DEMAND 7 $0.00 $1.00 $2.00 $3.00 $4.00 $5.00 $6.00 0 5 10 15 20 25 P Q The Market Demand Curve for Lattes P Q d (Market) $0.00 24 1.00 21 2.00 18 3.00 15 4.00 12 5.00 9 6.00 6
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THE MARKET FORCES OF SUPPLY AND DEMAND 8 Demand Curve Shifters The demand curve shows how price affects quantity demanded, other things being equal . These “other things” are non-price determinants of demand ( i.e., things that determine buyers’ demand for a good, other than the good’s price). Changes in them shift the D curve…
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THE MARKET FORCES OF SUPPLY AND DEMAND 9 Demand Curve Shifters: # of Buyers Increase in # of buyers increases quantity demanded at each price, shifts D curve to the right.
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THE MARKET FORCES OF SUPPLY AND DEMAND 10 $0.00 $1.00 $2.00 $3.00 $4.00 $5.00 $6.00 0 5 10 15 20 25 30 P Q Suppose the number of buyers increases. Then, at each P , Q d will increase (by 5 in this example). Demand Curve Shifters: # of Buyers
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THE MARKET FORCES OF SUPPLY AND DEMAND 11 Demand for a normal good is positively related to income. Increase in income causes increase in quantity demanded at each price, shifts D curve to the right.
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