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Professor Yamin Ahmad, Principles of Macroeconomics – ECON 202Economics 202Principles Of MacroeconomicsProfessor Yamin AhmadLecture 3: Review of Demand and Supply• Demand• SupplyProfessor Yamin Ahmad, Principles of Macroeconomics – ECON 202Note: These lecture notes are incomplete without having attended lecturesMarkets and Prices•A market is any arrangement that enables buyers and sellers to get information and do business with each other.•A competitive market is a market that has many buyers and many sellers so no single buyer or seller can influence the price.• The money price of a good is the amount of money needed to buy it.• The relative price of a good—the ratio of its money price to the money price of the next best alternative good—is its opportunity cost.Professor Yamin Ahmad, Principles of Macroeconomics – ECON 202Note: These lecture notes are incomplete without having attended lecturesDemandDefinition:QD= the amount of good or service that people reasonably desire to purchase (can afford) during a particular time at a particular priceProfessor Yamin Ahmad, Principles of Macroeconomics – ECON 202Note: These lecture notes are incomplete without having attended lecturesDemand• Demand Curve and Demand Schedule– The term demand refers to the entire relationship between the price of the good and quantity demanded of the good.–A demand curve shows the relationship between the quantity demanded of a good and its price when all other influences on consumers’ planned purchases remain the same.Professor Yamin Ahmad, Principles of Macroeconomics – ECON 202Note: These lecture notes are incomplete without having attended lecturesExample: CD-R SalesPrice(P) Quantity(QD;)$0.50 91.00 61.50 42.00 32.50 2Demand ScheduleProfessor Yamin Ahmad, Principles of Macroeconomics – ECON 202Note: These lecture notes are incomplete without having attended lecturesThe Demand CurveDProfessor Yamin Ahmad, Principles of Macroeconomics – ECON 202Note: These lecture notes are incomplete without having attended lecturesThe “Law” of DemandThe higher the price of the good, the smaller the quantity demanded (QD), ceteris paribusPrice (P)Quantity (QD)DProfessor Yamin Ahmad, Principles of Macroeconomics – ECON 202Note: These lecture notes are incomplete without having attended lecturesDemand• The Law of Demand results from –a substitution effect– an income effectProfessor Yamin Ahmad, Principles of Macroeconomics – ECON 202Note: These lecture notes are incomplete without having attended lecturesDemand• Substitution effect — when the relative price (opportunity cost) of a good or service rises, people seek substitutes for it, so the quantity demanded decreases.• Income effect — when the price of a good or service rises relative to income, people cannot afford all the things they previously bought, so the quantity demanded decreases.Professor Yamin Ahmad, Principles of Macroeconomics – ECON 202Note: These lecture notes are incomplete without having attended lecturesChanges in Demand• When any factor that influences buying plans other than the price of the good changes, there is a change in demand for that good. The quantity of the good that people plan to buy changes at each and every price, so there is a new demand curve.• When demand increases, the quantity that people plan to buy increases at each and every price so the demand curve shifts rightward.• When demand decreases, the quantity that people plan to buy decreases at each and every price so the demand curve shifts leftward.Professor Yamin Ahmad, Principles of Macroeconomics – ECON 202Note: These lecture notes are incomplete without having attended lecturesShifts in the Demand Curve• Income• Price of substitutes• Price of complements• Population, tastes, weather• Expected future prices• Quality of the productProfessor Yamin Ahmad, Principles of Macroeconomics – ECON 202Note: These lecture notes are incomplete without having attended lecturesDemand• A Change in the Quantity Demanded Versus a Change in Demand– This figure illustrates the distinction between a change in demand and a change in the quantity demanded.Professor Yamin Ahmad, Principles of Macroeconomics – ECON 202Note: These lecture notes are incomplete without having attended lecturesMovements along the Demand Curve• When the price of the good changes and everything else remains the same, there is a change in the quantity demanded and a movement along the demand curve.Professor Yamin Ahmad, Principles of Macroeconomics – ECON 202Note: These lecture notes are incomplete without having attended lecturesShifts in the Demand Curve• When one of the other factors that influence buying plans changes, there is a change in demand and a shift of the demand curve.Professor Yamin Ahmad, Principles of Macroeconomics – ECON 202Note: These lecture notes are incomplete without having attended lectures2 Common Confusions1. Individual vs. Market Demand2. Movements along vs. Shifts in Demand curveProfessor Yamin Ahmad, Principles of Macroeconomics – ECON 202Note: These lecture notes are incomplete without having attended lecturesQuantity SuppliedDefinition:QS= the amount of good or service that suppliers will be will be willing and able to sell during a particular time at a particular price, ceteris paribus– Resources and technology determine what it is possible to produce. Supply reflects a decision about which technologically feasible items to produce.Professor Yamin Ahmad, Principles of Macroeconomics – ECON 202Note: These lecture notes are incomplete without having attended lecturesSupply• Supply Curve and Supply Schedule– The term supply refers to the entire relationship between the quantity supplied and the price of a good.– The supply curve shows the relationship between the quantity supplied of a good and its price when all other influences on producers’ planned sales remain the same. Professor Yamin Ahmad, Principles of Macroeconomics – ECON 202Note: These lecture notes are incomplete without having attended lecturesExample: Supply of CD-RsPrice(P) Quantity(QS)$0.50 01.00 31.50 42.00 52.50 6Supply ScheduleProfessor Yamin Ahmad, Principles of Macroeconomics – ECON 202Note: These lecture notes are incomplete without having attended lecturesSupply Curve of CD-Rs• A rise in the price, other things remaining the same, brings an increase in the quantity supplied and a movement along the supply


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