ECO 105 1nd Edition Lecture 5 Outline of Last Lecture I. The Circular Flow Diagram (CFD)Outline of Current Lecture I. The Model of Supply and DemandII. HomeworkCurrent LectureI. The Model of Supply and Demanda. Implicationsi. Price “P”ii. Quantity “Q” (output)iii. Consumer surplus “CS”iv. Producer surplus “PS”v. Social surplus/welfare “SS” = CS + PSb. Some assumptions of the competitive model of supply and demandi. Many buyers and sellers in the market (consumers and producers)ii. Homogenous product/goodiii. Perfect informationiv. Free entry of sellersv. **These assumptions lead to the conclusion that no buyer or seller can affect the price of1. Price takersc. A little more about the modeli. DemandThese notes represent a detailed interpretation of the professor’s lecture. GradeBuddy is best used as a supplement to your own notes, not as a substitute.1. Demand schedule = represents the quantity of a good consumers are willing to buy at a finite number of pricesa. Example: weekly demand for dozens of eggs in Normal, ILPrice Quantity4 4,0003.5 4,2503 4,7502.5 5,5002 6,2501.5 7,7501 10,0000.5 12,7502. Demand curve/function = represents the quantity consumers are willing to buy at any/every priceii. Supply1. Supply schedule = represents the quantity sellers/producers are willing/able to sell at a finite number of pricesa. Willing/able = individual sale of the good increases profitPrice Quantity4 10,5003.5 10,2503 10,0002.5 9,5002 8,7501.5 7,7501 6,0000.5 4,0002. Supply curve = represents the quantity of a good producers are willing/able to profitably produce/sell at any/every priceiii. The interaction between supply and demandPriceQDQs4 4,000 10,5003.5 4,250 10,2503 4,750 10,0002.5 5,500 9,5002 6,250 8,7501.5 7,750 7,7501 10,0006,0000.5 12,7504,000d. Some more facts about supply and demandi. We stated that ∆Q/∆P < 0 when we were talking about demand1. This is the most concrete observable truth in economics therefore it gets a special namea. Law of demand∆Q/∆P < 02. Demand functions/curves generallyQD = f(P,Po,y)P = price of the good QPo = price of some other good Qoy = income of consumersQD = a + bP + cPo + dya. What is true about “b?”b < 0, b = ∆Q/∆PHow much does Q go down when P goes up by 1?b. What is true about “c?”If c > 0, then Q and Qo are substitutesIf c < 0, then Q and Qo are complimentsc. What is true about “d?”If d > 0, then Q is a normal goodIf d < 0, then Q is an inferior goodII. Homework p93-95 #1-8,