03ECO100OutlineSupplyDemand

Barbara implication q d 475 450 425 400 375 050 025

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Barbara ) Implication ( Q d ) $4.75 $4.50 $4.25 $4.00 $3.75 . . . $0.50 $0.25 Gazzale (University of Toronto) ECO100: Supply & Demand 7 / 35
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Demand Individual Demand Curve Relationship between price ( P ) and quantity demanded ( q d ) , everything else constant 24 Price/$ 5 3 4 2 1 1 3 5 7 2 4 6 9 10 20 19 30 29 Quantity Gazzale (University of Toronto) ECO100: Supply & Demand 8 / 35
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Demand Individual Demand Curve, Algebraically Relationship between price ( P ) and quantity ( q ) , everything else constant Gazzale (University of Toronto) ECO100: Supply & Demand 9 / 35
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Demand A Second Individual Interviewing Consumer 2: Barbara How many cups of coffee per week? 1 Highest price at which 1 cup/week? Because Barbara is rational (follows behavioral rule), we know: 2 Highest price at which 2 cups/week? Because Barbara is rational (follows behavioral rule), we know: 3 Highest price at which 3 cups/week? Because Barbara is rational (follows behavioral rule), we know: 9 Highest price at which 9 cups/week? Because Bob is rational (follows the behavioral rule), we know: Gazzale (University of Toronto) ECO100: Supply & Demand 10 / 35
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Demand A Second Individual Characterizing Barbara’s Demand 1 Demand Schedule 2 Demand Curve 3 Algebraically: Gazzale (University of Toronto) ECO100: Supply & Demand 11 / 35
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Demand Market Demand Market Demand from Individual Demands Conceptually Straightforward : Add up demands at each price ( P ). 1 Demand Schedule 2 Demand Curve 3 Algebraically: Gazzale (University of Toronto) ECO100: Supply & Demand 12 / 35
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Demand Market Demand Market Demand Curve: Summary Relationship between market price ( P ) and market quantity demanded ( Q d ) , everything else constant Decreasing Marginal Benefit “Law of Demand” 2 interpretations 1 If a price ( P ) does happen, what is quantity demanded? 2 Ordering high to low, what is the value (benefit) of the Nth unit? 2 caveats: Gazzale (University of Toronto) ECO100: Supply & Demand 13 / 35
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Demand Shifts in Demand So, how much coffee gets demanded? In a particular “market”, over a particular time frame . . . 1 Current price of coffee 2 Prices of related goods 3 Expected prices in future time frames 4 Income 5 Number of consumers in “market” 6 Tastes and preferences For each item in 2-6, how does a particular change affect the relationship between P and Q ? Gazzale (University of Toronto) ECO100: Supply & Demand 14 / 35
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Demand Shifts in Demand Changes in the Price of Related Goods Complements If more value from A if B consumed as well, then A and B are complements Substitutes If A and C are substitutes, then A and C are substitutes Gazzale (University of Toronto) ECO100: Supply & Demand 15 / 35
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Demand Shifts in Demand Expected Future Prices If “buying today” and “buying tomorrow” are substitutes . . . Gazzale (University of Toronto) ECO100: Supply & Demand 16 / 35
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Demand Shifts in Demand Changes in Income (or Wealth) Normal Good Income and demand move in same direction (positively related) Inferior Good Income and demand move in opposite direction Gazzale (University of Toronto) ECO100: Supply & Demand 17 / 35
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Demand Shifts in Demand Changes in Number of Consumers in Market Straightforward . . .
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