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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

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

slide7

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