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L5 - Demand, Supply and Market Price - 09232013.pdf

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University of Toronto St. George
James Pesando

Marginal Cost (MC) = additional cost if action is taken MC consists of OC MC if output of shirts increases by one Ex 1 (you hire a worker) $2 for cloth $10 to sewer MC = $12 (OC of $12 spent is $12) Ex 2 (You sew shirt yourself) $2 for cloth $20 (OC of your time) MC = $22 (OC of $2 spent plus OC of your time) Competitive Market Many buyers and sellers, each of whom has no influence on market price Ex. Coffee Law of Downward Sloping Demand Other things equal, the higher is the price of a good, the lower is the quantity demanded Price Quantity Demanded (Candy) 5 0 4 3 3 6 2 9 Market demand curve: sum of individual demand curves At each possible price, sum of quantities demanded by each individual 1. A change in quantity demanded (as the price of the good changes) is a movement along the demand curve 2. A change in demand (for a given price) is a shift in the demand curve 3. Sources of shifts in demand curves Price of related goods Substitutes Complements Income Preference "Other things equal" means: NO CHANGE in 1. price of related goods 2. income 3. preferences Substitutes ("Instead Of") Ex. Tea and Coffee Complements ("Together") Ex. Coffee and Cream If price of a SUBSTITUTE increases, demand for good INCREASES If price of a COMPLEMENT increases, demand for good DECREASES Ex. What happens to demand for "Big Macs" if McDonald's offers a free soft drink with each purchase? 1. Price of a complement (soft drink) falls, so demand for "Big Macs" increases 2. At a given price, the quantity demanded of "Big Macs" increases Shift in Demand Curve for Ice Cream Cones 1. Usually hot summer 2. Sharp drop in price of yogurt cones (Substitute) Supply Curve 1. Law of Upward-Sloping Supply Other things equal, the higher is the price of a good, the higher is the quantity
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