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DEMAND. What Buyers are Willing and Able to Buy, during a given Time Period, ceteris paribus. KEY POINTS ABOUT DEMAND. “WILLINGNESS AND ABILITY” (not stridently wanting) “BUYERS” (not sellers) “during a given time period” is a FLOW (not a STOCK)

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Demand l.jpg

DEMAND

What Buyers are Willing and Able to Buy, during a given Time Period, ceteris paribus.


Key points about demand l.jpg
KEY POINTS ABOUT DEMAND

  • “WILLINGNESS AND ABILITY” (not stridently wanting)

  • “BUYERS” (not sellers)

  • “during a given time period” is a FLOW (not a STOCK)

  • “ceteris paribus”- all other things are held constant except price and quantity.

  • Whole set of P-Q combinations (not QUANTITY DEMANDED)


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GENERALIZED DEMAND FUNCTION

P

f = f( Price:

Taxes,

Price of Complements

Price of Substitutes

Tastes for good/service

Income,

Buyer Expectations,

Number of buyers)

Q


Supply l.jpg

SUPPLY

What Buyers Sellers are Willing and Able to buy Sell, during a given Time Period, ceteris paribus.

XXXXX

XXX


Key points about supply l.jpg
KEY POINTS ABOUTSUPPLY

  • “WILLINGNESS AND ABILITY” (not stridently wanting)

  • “BUYERS” (not sellers)

  • “during a given time period” is a FLOW (not a STOCK)

  • “ceteris paribus”- all other things are held constant except price and quantity.

  • Whole set of P-Q combinations (not QUANTITY DEMANDED)

XXXXXXXXXXXXXXXXXXX Sellers (not buyers)

XXXXXXXXXXX SUPPLIED


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GENERALIZED SUPPLY FUNCTION

f = f( Price:

Price of Resources

Technology,

Seller Expectations,

Number of Sellers)


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HOW TO BE SHERLOCK HOLMES

IN READING BETWEEN THE LINES

If You Know P and Q then you know whether demand or supply

is involved as well as the direction of the shift.

If You Know the shift in demand or supply, then you know what

is likely to happen to price and quantity

If You Know the determinant that has changed and price,

then you know what is happening to quantity demanded.

If You Know the determinant that has changed and quantity demanded,

then you know what is happening to price.


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Lower Price Higher Price

Lower

Output

Higher

Output

Leftward

(downward)

Shift of Demand

Leftward

(upward)

Shift of

Supply

Rightward

(downward)

Shift of

Supply

Rightward

(upward)

Shift of Demand

Breakdown all shifts into their output and price vectors


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MARKET BOUNDARIES

  • BUYER POINT OF VIEW: No potential seller exists outside of the market boundaries (within a reasonable price range)

  • SELLER POINT OF VIEW: No potential buyer exists outside of the market boundaries (within a reasonable price range)

  • BOTH POINTS OF VIEW MUST HOLD

  • CROSS PRICE ELASTICITY measures


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MARKET BOUNDARIES

X represents buyers

O represents sellers

X

X

O

O

X

X

X

O


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MARKET DEMAND FOR CARS

Price ($1000/car)

Price ($1000/car)

Price ($1000/car)

30

15

7 9 4 5 11 14

U.S quantity (mill/yr) + Foreign Q (mill/yr) = Market Demand


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MUSTANG DEMAND

GAINS-LOSS=$2974 M.

Price of Mustangs

TR= $1426 million

9510

TR= $4400 Million

GAIN

8000

LOSS

DEMAND

150

550

(000’s Mustangs/year)


Market boundaries13 l.jpg

N represents a new firm

MARKET BOUNDARIES

U represents your firm

X represents buyers

O represents sellers

X

X

O

O

X

U

X

N

X

O

Cross Price Elasticity w.r.t. New Firm?


Market boundaries14 l.jpg

N represents a new firm

MARKET BOUNDARIES

U represents your firm

X represents buyers

O represents sellers

X

X

O

N

O

X

U

X

X

O

Cross Price Elasticity w.r.t. New Firm?

Positive , Negative, or Zero




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