DEMAND AND SUPPLY.docx

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Department
Business and Environment
Course
BSEN 401
Professor
William Huddleston
Semester
Fall

Description
DEMAND AND SUPPLY This lecture examines the basic Demand/Supply model that is central to microeconomics. We do so by defining the relationship between Price and Quantity in Demand and Supply without analyzing the cause of those relationships. We analyze the cause of the relationships later in the course. We begin with a definition of Microeconomics and Partial Equilibrium Analysis before explaining the importance of Demand/Supply for markets. Definition: Microeconomics is the study of individual units in an economy (households, firms, markets, etc.) and their relationships. This entails the study of the allocation of resources and the distribution of income. Methodology Modern economics relies heavily on two methodological tools: partial equilibrium analysis and atomism. Definition: Equilibrium is a state of rest with no tendency to change given existing forces (variables) Definition: Partial Equilibrium Analysis is the analysis of the relationship between two variables while holding other relevant variables constant (ceteris paribus = other things equal), then examining the effect of the other variables by systematically examining their variation. 0 Example At what temperature does water boil? Most people would answer 100 C but in fact this is only true holding at least two other variables constant: atmospheric pressure (sea level) and purity of the water (not salty, for example). Scientists use partial equilibrium analysis all the time to isolate relationships before they analyze the variations caused by changes in other variables. Definition: General Equilibrium Analysis is the analysis of the relationship between all variables simultaneously. (We won’t use this approach in this class)
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