Lecture 2 Supply and Demand Model

Lecture 2 Supply and Demand Model - Lecture 2 Supply and...

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Lecture 2 Supply and Demand Model, Elasticity and Efficiency EC1101E Introduction to Economic Analysis
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2 Lecture Outline 1. Supply-Demand Model Movement along the demand curve versus shift of the demand curve Market effects of changes in demand and supply Using the model of demand and supply 2. Elasticity Price, Income, Cross elasticity of demand; supply elasticity Elasticity along a linear demand curve Using the elasticity formula 3. Market Efficiency Defining economic efficiency Maximum/minimum price and deadweight loss Impact of government intervention in controlling market price and restricting market quantity Effects of taxes.
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3 Individual Demand Curve and Law of Demand The individual demand curve The law of demand downward sloping demand curve A movement along an individual demand curve
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4 4 The Individual Demand Curve b c d e f Law of demand: When the price increases from $18 to $24, the quantity demanded decreases from 7 cakes per month to 4 cakes per month - Movement along demand curve $30 24 18 12 6 0 1 4 7 10 13 Durian cakes per month Price per durian cake
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5 Substitution and Income Effects Two demand effects: 1. Substitution effect Results from change in relative price 2. Income effect Results from change in the consumer’s real income caused by a change in the price of one good.
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6 6 The Market Demand Curve 16 6 $24 12 Price Durian cakes per month (C) Market Demand Market demand k Durian cakes per month (A) Ace's Demand 4 10 $24 12 c e Ace's demand j At the price of $24, quantity demanded by Ace is 4 durian cakes,. . 1 ...quantity demanded by Bee is 2 durian cakes,. .. 2 ...so the market demand which equals the quantity demanded by Ace plus the quantity demanded by Bee is 6 (i.e. 4 + 2) durian cakes. 3 At the price of $12, quantity demanded by Ace is 10 durian cakes,. . 1 ...quantity demanded by Bee is 6 durian cakes,. .. 2 ...so the market demand which equals the quantity demanded by Ace plus the quantity demanded by Bee is 16 (i.e. 10 + 6) durian cakes. 3 2 6 $24 12 g h Bee's demand (B) Bee's Demand Durian cakes per month
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7 Individual Supply Curve and Law of Supply The individual supply curve The law of supply upward sloping supply curve A movement along an individual supply curve
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8 8 The Individual Supply Curve 3 This continues until the quantity is reached where once again, MB = MC As price rises, quantity produced increases as long as MB > MC 2 Marginal benefit (MB) with $30 price Marginal benefit (MB) with $24 price 1 At the price of $24, the quantity produced is where MB = MC Supply and marginal cost m n p q r 18 24 30 $36 100 200 300 400 500 Price per durian cake Durian cakes per month 12 Law of supply: When the price increases from $24 to $30, the quantity supplied increases from 300 cakes per month to 400 cakes per month - Movement along supply curve 4
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9 9 The Market Supply Curve At the price of $24, Delicakes supplies 300 durian cakes. .. 1
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Lecture 2 Supply and Demand Model - Lecture 2 Supply and...

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