03_SupplyandDemand_

03_SupplyandDemand_ - The Market Process Supply...

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1 The Market Process: Supply & Demand (Section 3) I. The demand curve (Consumers) A. Deriving the demand curve
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2 B. Consumer Surplus Consumer surplus - The difference between the maximum price consumers are willing to pay and the price they actually pay. (Net benefit derived from buying the goods) Back to our example: C. Law of demand Law of demand - There is a negative (inverse) relationship between the price of a good and the quantity of it consumers are willing to purchase. Why? Substitutes (Alternatives)
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3 D. Elastic & Inelastic Demand Curves Elastic demand - Quantity demanded is sensitive to a price change [A small price change will lead to a large change in quantity demanded] Inelastic demand - Graphs: What makes a good’s demand elastic or inelastic? Note that saying: More elastic is the same as saying less inelastic and Saying more inelastic is the same as saying less elastic
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4 Perfectly inelastic demand curve: Interpret this line:
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5 E. Changes in Quantity Demanded Changes in quantity demanded - A change in quantity of a good purchased in response to a change in the price of that good. [A movement along the demand curve] Graph:
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6 F. Changes in Demand Change in demand - Things that affect how much people want to purchase of the good other than the price of that good. [This is a shift of the demand curve] Graph an increase in demand (interpret): Graph a decrease in demand (interpret):
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7 Important Note : A change in demand is not the same as a change in quantity demanded (this is just definitional but the distinction is important) What shifts the demand curve? In general: Anything that at every given price makes consumers want more or less of the good.
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8 Specifically, what shifts the demand curve (a change in demand) : 1. Income a) b) 2. Price of related goods a) b)
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9 3. Tastes & preferences 4. Expectations of future prices 5. Number of buyers changes 6. Demographic changes What does not shift the demand cure?
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10 II. The Supply Curve A. Deriving the supply curve (basic idea)
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11 B. Producer surplus (basic idea) Producer surplus - The difference between the minimum price suppliers are willing to accept and the price they actually receive [Net gains to supplier (producers)] Back to our example:
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12 C. Suppliers (A little more formal) Economic Profit : costs) y opportunit (Including Costs Total - Revenue Total = π Total Revenue = (Price of item)*(Number of items sold) Total costs: Things economists would include in total costs that accountants wouldn’t Law of supply - As the price of a good increases producers will wish to supply more of it / As the price of a good decreases producers will wish to supply less of it Why?
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D. Elastic and Inelastic supply curves Elastic supply - Quantity supplied is sensitive to a price change [A small price change will cause a large change in quantity supplied] Inelastic supply - Graph: What makes a good’s supply elastic or inelastic? Perfectly Inelastic supply curve:
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03_SupplyandDemand_ - The Market Process Supply...

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