Meco 6303 business economics
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MECO 6303 – Business Economics PowerPoint PPT Presentation

MECO 6303 – Business Economics. Lesson Two Demand and Supply Part A The Theory of Demand. In this lesson we will investigate the following:. Supply and Demand Demand Law of Demand. Movement of Curve vs. movement along curve. Ceteris Paribus assumption. Supply Upward Sloping.

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MECO 6303 – Business Economics

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Meco 6303 business economics

MECO 6303 – Business Economics

Lesson Two

Demand and Supply

Part A

The Theory of Demand


In this lesson we will investigate the following

In this lesson we will investigate the following:

  • Supply and Demand

    • Demand

      • Law of Demand.

      • Movement of Curve vs. movement along curve.

      • Ceteris Paribus assumption.

    • Supply

      • Upward Sloping.

      • Movement of Curve vs. movement along curve.

      • Ceteris Paribus assumption.

    • Equilibrium (competitive)

      • Shortages and Surpluses.

      • Using supply and demand to predict prices and quantities and other applications

MECO 6303 Business Economics Lesson Two - Part A


Defining demand

Defining Demand

  • Definition: The amount demanded is the amount that wouldbepurchased of a particular product at a particular price at a particular time, all other relevant things constant.

  • Refers to the hypothetical ability and willingness to purchase

    • Desire without purchasing power is irrelevant

    • It is all hypothetical - equi-temporal - alternative hypothetical points at the same point in time.

MECO 6303 Business Economics Lesson Two - Part A


All other relevant things constant the ceteris paribus conditions

All Other Relevant Things Constant(the ceteris paribus conditions)

  • What are they?

    • Tastes (what does this mean?)

    • Income

    • Other related prices

      • Substitutes – Coke and Pepsi.

      • Complements – cars and gasoline.

    • Expectations

      With this in mind, let’s draw a demand curve.

MECO 6303 Business Economics Lesson Two - Part A


Constructing a demand curve one individual

Constructing a demand curveOne Individual

Price

Price is on the vertical axis, quantity the horizontal – the reverse of the usual mathematical convention.

P1

1

2

P2

Individual demand curve

Quantity Demanded

0

Q2

Q1

MECO 6303 Business Economics Lesson Two - Part A


From the individual to the market

From the individual to the market

Price

1+ 2 + … + = n

1 + 2

1

0

Quantity demanded

MECO 6303 Business Economics Lesson Two - Part A


Meco6303lesson2parta

The Law of Demand

  • What is the law?

    • The demand curve slopes down

      • When the price is lower people buy more (no less); when the price is higher people buy less (no more).

Demand Curve

0

MECO 6303 Business Economics Lesson Two - Part A


What kind of law is this

What kind of law is this?

  • A combination of logic and knowledge of human nature

  • What is the law?

    • The demand curve slopes down at a higher price consumers will not buy more; at a lower price consumers will not buy less.

    • More simply: at a higher price consumers will buy less; at a lower price consumers will buy more

    • Other things constant !!!

MECO 6303 Business Economics Lesson Two - Part A


Time is important time enters in in three different ways

Time is importantTime enters-in in three different ways.

  • No one has ever seen a demand curve – why not?

    • Multiple hypothetical points at a single moment in time (now) or out of “real time.”

    • Does this mean it does not exist? (Has anyone seen an atom?)

  • Demand can be a stock or a flow

    • Flow  quantity per period of time; apples per day; Q/t

    • Stock  quantity at a point of time; all the paintings of Picasso; Q

  • The longer the time (real time) to react the flatter the demand curve (the more “elastic” over any price range). [here we are talking about a subtly different demand curve].

MECO 6303 Business Economics Lesson Two - Part A


A shift in demand

A Shift in Demand

  • So when something relevant changes, we have to draw another curve: for example an increase in demand may be caused by:

    • an increase in income

    • a change in (increased intensity of) tastes

    • an increase in the price of a substitute

    • a decrease in the price of a complement.

MECO 6303 Business Economics Lesson Two - Part A


An increase in demand

An Increase in Demand

D1

D

P

0

Q

MECO 6303 Business Economics Lesson Two - Part A


It is important to keep the terminology straight

It is important to keep the terminology straight.

  • It’s a matter of cause and effect.

  • A change in the amount demanded refers to a movement along a demand curve

    • A change in price causes a change in the amount (quantity) demanded.

  • A change in demand refers to a movement (shift) of the (whole) demand curve.

    • A change in something else (income, related prices, tastes, expectations, etc.) causes a change in both the price and the quantity demanded.

End of Part A

MECO 6303 Business Economics Lesson Two - Part A


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