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topic 3 - Demand Supply and Market Price.pdf

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University of Toronto St. George
James Pesando

Topic 3 – Demand, Supply and the Market Price th (Week three Sep 27 ) Outline: 1. The Demand Curve -- Law of Downward-Sloping Demand; -- Market vs. Individual Demand Curve; -- Movement Along vs. Shift; 2. The Supply Curve -- Law of Upward-Sloping Supply; -- Market vs. Firm Supply Curve; -- Movement Along vs. Shift; 3. Equilibrium (Price, Quantity) in Competitive Market -- How Equilibrium is Determined; -- Examples;  The Demand Curve Competitive market: many buyers and sellers, each of who has no influence on market price (e.g. coffee); 1. Law of Downward-Sloping Demand Other things equal, the higher is the price of the good, the lower is the quantity demanded. Individual Demand Price Quantity Price Demanded 5 0 5 4 3 3 6 2 2 9 9 Quantity Demanded 2. Market Demand Curve The sum of individual demand curve (at each possible price, sum of the quantities demanded by each individual) Price Jane’s individual demand Price John’s individual demand Price Market demand 3 3 3 6 Quantity Demanded 3 Quantity Demanded 9 Quantity ECO100Y1-Pesando-Notes edited by Eva Wu Demanded 3. Movement Along vs. Shifts a. A change in quantity demanded (as the price of the good changes) is a movement along the demand curve; b. A change in demand (for a given price) is a shift in the demand curve; c. Sources of shifts in demand: -- Price of related goods: substitutes; complements; -- Substitute – “instead of” (e.g. coffee & tea); -- Complements – “together” (e.g. coffee & cream); -- Income; -- Preferences; c. Insights: -- Movement along: the curve does not change; -- Shifts: the curve changes e.g. 1. Shift in Demand Curve for Ice Cream Cones scenario #1 Unusually hot summer; scenario #2 sharp drop in price of yogurt cones (substitute) Price demand of Ice Cream Cones #1 Pricedemand of Ice Cream Cones #2 ee ee DD’ DD DD $2 $2 DD’ 500 750 Quantity Demanded 300 500 Quantity Demanded Demand increase price of a substitute decrease = demand curve shifts outwards = quantity demanded of the substitute increase = demand decrease = demand curve shifts inwards  Supply Curve 1. Law of Upward-Sloping Supply Other things equal, the higher is the price of a good, the higher is the quantity supplied; (source: firms seeking to maximize profits) Individual supplied curve Price Quantity Price Supplied 5 9 5 4 6 3 3 2 2 0 ECO100Y1-Pesando-Notes edited by Eva Wu 9 Quantity Supplied 2. Market Supplied Curve The sum of individual firm supply curves (at each possible price, sum of the quantities supplied by each individual) PriceJane’s individual supply Price John’s individual supply Price Market supply 3 3
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