04_Supply_Demand_and_Equilibrium

04_Supply_Demand_and_Equilibrium - Demand, Supply &...

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HOW MARKETS WORK: Intro to Macro (ECON 0110) Torsten Jochem Outline 1. Demand 2. Supply 2 6. Deadweight Loss 3. Market Equilibrium 4. Consumer & Producer Surplus 7. Economic Efficiency 8. Taxation b Goal b Last class we said that in the course we will study the market economy (rather than a communal economy). b So, we need some model for the market mechanism in 3 order to talk about … s How a good’s price comes into existence. s What sources create price changes. s How taxation impacts the market. s How price interventions by the government (price floor, price ceiling) impacts the market. b 1. Demand Side b The Law of Demand: s Ceteris paribus , as the price of a good/service falls, demand for it increases. 4 Demand, Supply & Equilibrium
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b 1. Demand Side b Why? s 1. Substitution Effect: A price change also changes the lative price toward substitutes. The demand for substitutes 5 relative price toward substitutes. The demand for substitutes may go up/down as a result of a price inc/decrease. s 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. s 2. Income Effect: At a lower price, the purchasing power of income is higher, which leads to higher quantity demanded. 6 b 1. Demand Side b Example: emand Schedule price The Law of Demand Demand Schedule of pizzas Price Quantity $5.00 100 $3.00 500 $1.00 1,000 quantity $5.00 $3.00 $1.00 100 500 1,000 DEMAND leads to a downward- slopping Demand curve. b 1. Demand Side b Good Relationships s Substitutes : Goods that can be used for same purpose g., gyro for schnitzel, bus tickets for gas, email 7 Demand Side s E.g., gyro for schnitzel, bus tickets for gas, email for snail mail, … s Complements: Goods that go with one another s E.g., car with gas, beer with fries, textbooks with school supplies, … b 1. Demand Side b Good types Responsiveness to income changes ) A ormal ood: As income increases, consumption of the 8 Demand Side s (i) A Normal Good: good increases s E.g., clothes, vacations, electronics,… s (ii) An Inferior Good: As income increases, consumption of the good decreases s E.g., potatoes or rice is replaced with more meat as income goes up.
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b 1. Demand Side b Shift in Demand 9 Demand Side price 5.00 Reasons for Increase in Demand (=Demand curve shifting to the right) quantity $5.00 $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 b 1. Demand Side b Shift in Demand 10 Demand Side price 5.00 Reasons for Decrease in Demand (=Demand curve shifting to the left) quantity $5.00 $3.00 $1.00 100 500 1,000 D2 D1 1. Increase in income (when the
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This note was uploaded on 03/26/2012 for the course ECON 0100 taught by Professor Kenkel during the Spring '08 term at Pittsburgh.

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04_Supply_Demand_and_Equilibrium - Demand, Supply &...

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