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04_Supply_Demand_and_Equilibrium

04_Supply_Demand_and_Equilibrium - Demand Supply...

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HOW MARKETS WORK: DEMAND, SUPPLY & EQUILIBRIUM Intro to Macro (ECON 0110) Torsten Jochem Demand, Supply & Equilibrium Outline 1. Demand 2. Supply 2 5. Price Floor & Ceilings 6. Deadweight Loss 7. Economic Efficiency 3. Market Equilibrium 4. Consumer & Producer Surplus 8. Taxation box2 Goal box5 Last class we said that in the course we will study the market economy (rather than a communal economy). box5 So, we need some model for the market mechanism in 3 Demand, Supply & Equilibrium order to talk about … square6 How a good’s price comes into existence. square6 What sources create price changes. square6 How taxation impacts the market. square6 How price interventions by the government (price floor, price ceiling) impacts the market. box2 1. Demand Side box5 The Law of Demand: square6 Ceteris paribus , as the price of a good/service falls, demand for it increases. 4 Demand, Supply & Equilibrium
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box2 1. Demand Side box5 Why? square6 1. Substitution Effect: A price change also changes the relative price toward substitutes. The demand for substitutes 5 Demand, Supply & Equilibrium may go up/down as a result of a price inc/decrease. square6 E.g.: If price of schnitzel goes down by $1, its relative price to a gyro goes down, shifting demand from gyros over to schnitzel. square6 2. Income Effect: At a lower price, the purchasing power of income is higher, which leads to higher quantity demanded. 6 box2 1. Demand Side box5 Example: Demand Schedule price $5.00 Demand, Supply & Equilibrium The Law of Demand leads to a downward- of pizzas Price Quantity $5.00 100 $3.00 500 $1.00 1,000 quantity $3.00 $1.00 100 500 1,000 DEMAND slopping Demand curve. box2 1. Demand Side box5 Good Relationships square6 Substitutes : Goods that can be used for same purpose square6 E.g., gyro for schnitzel, bus tickets for gas, email 7 Demand Side for snail mail, … square6 Complements: Goods that go with one another square6 E.g., car with gas, beer with fries, textbooks with school supplies, … box2 1. Demand Side box5 Good types Responsiveness to income changes square6 (i) A Normal Good: As income increases, consumption of the 8 Demand Side good increases square6 E.g., clothes, vacations, electronics,… square6 (ii) An Inferior Good: As income increases, consumption of the good decreases square6 E.g., potatoes or rice is replaced with more meat as income goes up.
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box2 1. Demand Side box5 Shift in Demand 9 Demand Side price $5.00 Reasons for Increase in Demand (=Demand curve shifting to the right) quantity $3.00 $1.00 100 500 1,000 D1 D2 Increase in… 1. Income (and good is normal) 2. Taste 3. Population 4. Expected future price higher 5. Price of related good a. Price of substitute goes up b. Price of complement goes down box2 1. Demand Side box5 Shift in Demand 10 Demand Side price $5.00 Reasons for Decrease in Demand (=Demand curve shifting to the left) quantity $3.00 $1.00 100 500 1,000 D2 D1 1. Increase in income (when the good is inferior) 2. Taste decline 3. Population decline 4. Expected future price lower 5. Price of related good: a. Price of substitute goes down b. Price of complement goes up box2 2. Supply Side box5 The Law of Supply square6 Ceteris paribus
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