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Lecture 4

ECN 211 Lecture 4: Notetaker Notes: Topic 4 Chapter 4 - Supply & Demand

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Arizona State University
ECN 211
Stefan Ruediger

LECTURE 4: TOPIC 4/CHAPTER 4 - SUPPLY & DEMAND Song of the day: Weird al Yankovic - Ebay • Ability + willingness to sell -> supply • Ability + willingness to pay -> demand The price of oil • In this chapter we will attempt to explain the price of oil ◦ Oil: we interact with it all the time • Since January 2006 the world price of oil (Brent) has fluctuated widely ◦ Demand fluctuations and supply fluctuations ◦ January 2006: $64 per Barrel ◦ July 2008: $143 per Barrel ◦ December 2008: $33 per Barrel ◦ March 2012: $125 per Barrel ◦ January 2014: $46 per Barrel ◦ May 2015: $64 per Barrel ◦ November 2015: $44 per Barrel ◦ Set up a framework, break things down to only the necessary info for the model • WHY? Markets and Competition • Market- a group of buyers and sellers of a particular product • Competitive market- one with many buyers and sellers, each has a negligible effect on price ◦ Not one buyer, not one seller ‣ Many buyers and many sellers • In a perfectly competitive market: ◦ All goods exactly the same ◦ Buyers & sellers so numerous that no one can affect market price—each is a “price taker” ‣ What you offer doesn't change the market price • Ex. Bought a protein bar ◦ Price didn't change • Ex. Worked ◦ Wages didn't change ◦ Identical products and each buyer and seller are so small that they can't really influence the markets • In this chapter, we assume markets are perfectly competitive. ◦ Assume all markets talked about in this class are competitive & perfectly competitive markets • Utility markets aren't competitive & perfectly competitive markets ◦ They're called natural monopolies • Garage sale is not a competitive market ◦ One seller, not many buyers • Competitive & perfectly competitive markets ◦ Wheat, soy, milk Basics of Demand • Easy points for exam (vocab) • Law of Demand- when the price of a good rises, the quantity of the good demanded will fall, ceteris paribus (“all else remaining the same”) ◦ We'd prefer to pay less for what we buy ◦ Price goes up, demand goes down, price goes down, demand goes up ‣ Price of a good • Quantity Demanded- the amount of a good that buyers would choose to buy at a particular price given the constraints they face ◦ Specific amount related to a specific price ◦ All of it ◦ Our approach to a specific product in the market • Demand Schedule- a table: quantities of a good that consumers would choose to purchase at different prices, ceteris paribus • Demand Curve- Graph of a demand schedule Active Learning • How much would you be willing to pay for... a concert (example) ◦ Willingness to pay increases through... (Demand curve shifters) ‣ Backstage access ‣ Company/friends ‣ Autographs ‣ Reunion tour ‣ Venue ‣ After party ‣ Multiple artists ‣ Spend a day with them then concert ‣ Free alc ◦ All of these caused an increase in demand A -> C ‣ Very different from quantity demanded ◦ Quantity demanded A -> B Factors That Shift the Demand Curve • More detail for 1 and 3 1. Income 2. Wealth 3. Prices of related goods 4. Population 5. Expected price 6. Tastes 7. Other variables Important chapter to read! 1. Income- the amount that a person or firm earns over a particular period ◦ Income goes up, more willing to buy ◦ Income goes down, less willing to buy ◦ Normal good- a good that people demand more of as their income rises ‣ Normal goods- what you buy more of when your income goes up ‣ Increase the demand for a normal good • Rightward shift of the demand curve ‣ Ex. Eating out ◦ Inferior good- a good that people demand less of as their income rises ‣ Inferior goods- what you buy less of when your income goes up • Not related to the quality of the good • Relates to the location in which you rank the good relative to others and your income ‣ Decrease the demand for an inferior good • Leftward shift of the demand curve ‣ Ex. $1 ramen noodles 2. Wealth- total value of everything a person/firm owns ◦ Cash, bank accounts, stocks, bonds, real estate ◦ At a point in time ◦ Minus the total amount owed ‣ Home mortgage, credit card debt, auto loan, student loan ‣ Same mechanism as with changes in income 3. Prices of related goods ◦ Substitutes- a good that can be used in place of some other good ‣ Things you would've consumed instead of the concert ‣ Ex. • Cereal vs. bacon and eggs ◦ Separate: cereal OR bacon and eggs ◦ If eggs get more expensive, more people would buy bacon and eggs ◦ If bacon and eggs get more expensive, more people would buy cereal ‣ A rise in the price of a substitute increases the demand for a good ◦ Complements- a good that is used together with some other good ‣ Concert ex were all complements • Things to consume together with the concert ‣ Ex. • Cereal AND the milk ◦ Consumed together ◦ Cereal price goes up, less likely to buy milk as well and would resort to the substitute (bacon and eggs) ‣ Rise in price for one product, less like to buy the complementary good as well ‣ A rise in the price of a complement decreases the demand for a good 4. Increase in population (the number of buyers) ◦ Increase in demand 5. Expected price ◦ An expectation that price will rise in the future ‣ Expecting price to rise in the future • More likely to buy now ‣ Shifts the current demand curve rightward ◦ An expectation that price will fall ‣ Expecting price to fall in the future • More likely to buy later ‣ Shifts the current demand curve leftward 6. Tastes or preferences ◦ Tastes change towards a good ‣ Less people like it, less people buy ‣ Increase in demand ◦ Tastes change away from a good ‣ More people like it, more people buy ‣ Decrease in demand 7. Other shift variables ◦ Describe how society interacts with the market ◦ Government subsi
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