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Chapter 4: Demand and Supply

Chapter 4: Demand and Supply. Markets – communication among buyers and sellers for the purpose of trading. Demand Definition – various amount of a good people are willing and able to buy at various prices Needs – must have Wants - optional Law of Demand – Price increases, Qd decreases

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Chapter 4: Demand and Supply

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  1. Chapter 4:Demand and Supply

  2. Markets – communication among buyers and sellers for the purpose of trading

  3. Demand • Definition – various amount of a good people are willing and able to buy at various prices • Needs – must have • Wants - optional • Law of Demand – Price increases, Qd decreases • Diminishing marginal utility – as you consume additional units of the same item you enjoy them less • Demand Curve • Market Demand – sum of the individual demand curves

  4. Determinants of Demand – shift the demand (New Tip or Wet Pin) • Willingness • Tastes and Preferences • Fads and Fashions • Advertising • Technology – new and replacement products • Number and composition of buyers • Population • Demographics • Prices of related goods • Substitutes – Pa rises Qda falls, Demand for b rises • Complements - Pa rises Qda falls, Demand for b falls • Expectations • Ability • Income • Normal – income rises, demand rises • Inferior - income rises, demand falls • Wealth

  5. Demand vs. Quantity Demanded • Demand is the whole curve • Quantity demanded is one price and point on the curve

  6. Supply • Definition – various amounts of a good sellers are willing and able to sell at various prices • Law of Supply – Price rises, Qs rises • Example: Qoil rigs = 1021.35 + 21.82 Poil • Supply Curve • Market Supply – sum of the individual supply curves

  7. Determinants of Supply • Resource prices – costs of production • Technology • Taxes and subsidies • Prices of related goods – other produced goods • Substitutes - If the price of a substitute good rises you will produce more of that and less of the other good • Diamond Brands – produces Toothpicks and Matches • Green Giant – Corn, peas and green beans • Jointly produced goods – Price of Beef rises, the Qs of Beef rise, the supply of leather rises • Beef and leather • Expectations • Number of Sellers • Production Restrictions • Government

  8. Changes in supply and quantity supplied • Supply is the whole curve • Quantity supplied is one price and point on the curve

  9. Market equilibrium: Qs = Qd • Where the market clears • Transactions costs • Costs of • Information • Search • Convenience – hours, service, location and payment methods • Time • If transactions costs were zero all prices would be the same • Non equilibrium situations – if left alone they will eliminate themselves • Surplus: Qs>Qd • Price floor – cheating • Shortage: Qd> Qs • Price ceiling - scalping • Changes in Demand and Supply: Magic Box

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