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Lecture

Chapter 3 Lecture Notes .doc

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Department
Economics
Course
ECON 101
Professor
Corey Van De Waal
Semester
Winter

Description
Chapter 3: Demand and Supply FTR, section 002 & 004, winter 2011,UW In this chapter, look for the answers to these questions:  What factors affect buyers’ demand for goods?  What factors affect sellers’ supply of goods?  How do supply and demand determine the price of a good and the quantity sold?  How do changes in the factors that affect demand or supply affect the market price and quantity of a good?  How do markets allocate resources? Markets and Competition  A market is a group of buyers and sellers of a particular good or service.  A competitive market is one in which there are so many buyers and so many sellers that each has a negligible impact on the market price.  A perfectly competitive market: • all goods are exactly the same • buyers & sellers so numerous that no one can affect the market price – each is a “price taker”  In this chapter, we assume markets are perfectly competitive. Demand  Demand comes from the behaviour of buyers.  The quantity demanded of any good is the amount of the good that buyers are willing and able to purchase.  Law of demand: the claim that, other things equal, the quantity demanded of a good falls when the price of the good rises.  Demand occurs when you are willing to buy it (want it) and able to buy it (have money and can afford it ) The Demand Schedule 1  A table that shows the relationship between the price of a good and the quantity demanded.  Example: Helen’s demand for lattes. Price Quantity of lattes of lattes demanded $0.00 16 1.00 14 2.00 12 3.00 10 4.00 8 5.00 6 6.00 4 ** What can you say from the above demand schedule?** The Law of Demand: ………………………………………………………… 2 Helen’s Demand Curve from the above Demand Schedule: Price of Lattes Quantity of Lattes Market Demand versus Individual Demand  The quantity demanded in the market is the sum of the quantities demanded by all buyers at each price.  Suppose Helen and Ken are the only two buyers in the Latte market. (Qd = quantity demanded) 3 Price Helen’s Qd Ken’s Q d Market Demand $0.00 16 8 24 $1.00 14 7 21 $2.00 12 6 18 $3.00 10 5 15 $4.00 8 4 12 $5.00 6 3 9 $6.00 4 2 6 The Market Demand Curve for Lattes 4 Price of Lattes Quantity of Lattes Demand Curve Shifters  The demand curve shows how price affects quantity demanded, other things being equal.  These “other things” are non-price determinants of demand (i.e., things that determine buyers’ demand for a good, other than the good’s price).  Changes in them shift the D curve… 1. Number of Buyers 5 P $6.00 $5.00 $4.00 $3.00 $2.00 $1.00 $0.00 Q 0 5 10 15 20 25 30 2. Income  Demand for a normal good is positively related to income.  Demand for an inferior good is negatively related to income. 3. Prices of Related Goods substitute or complementary goods?en there is a change in the price of 4. Tastes Example: Atkins diet increased demand for eggs. 5. Expectations 6 Expectations affect consumers’ buying decisions ** What happens to the demand for new autos when the economy turns bad and people worry about future job security: Summary: Variables That Affect Demand Variable A change in this variable Price …causes a movement along the D curve No. of buyers …shifts the D curve Income …shifts the D curve Price of related goods …shifts the D curve Tastes …shifts the D curve Expectations …shifts the D curve Supply  Supply comes from the behaviour of sellers.  The quantity supplied of any good is the amount that sellers are willing to sell.  Law of supply: the claim that, other things equal, the quantity supplied of a good rises when the price of the good rises. The Supply Schedule  Suppl
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