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UT Knoxville ECON 201 - Supply and Demand

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ECON 201 1st Edition Lecture 8 Outline of Last Lecture I. Tradea. Definition of specializationII. Trade and the PPF Examplea. Definition of exportsb. Definition of importsIII. Benefits of Tradea. Definition of absolute advantageb. Definition of comparative advantageOutline of Current Lecture I. Comparative Advantage ReviewII. Assumptions of Supply and Demanda. Definition of marketb. Definition of competitive marketc. Definition of perfectly competitive marketd. Definition of rational peoplee. Definition of marginal analysisIII. Demanda. Definition of demandb. Definition of quantity demandedc. Definition of law of demandd. Definition of demand schedulee. Definition of demand curveIV. Satisfactiona. Definition of utilityb. Definition of satisfaction utilityc. Definition of marginal utilityd. Definition of diminishing marginal utilityV. Market Demand vs. Individual DemandVI. Demand Curve Shiftersa. Definition of normal goodsb. Definition of inferior goodsThese 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.c. Definition of substitute goodsd. Definition of complement goodsCurrent LectureI. Comparative Advantage ReviewThis lecture began with a quote from the Wall Street Journal about America’s trade position of knowledge-intensive industries.“A competitive America does not mean competitive success for every American industry.Many voices argue that manufacturing is somehow special, and it is indeed important. But so, too, are many knowledge-intensive industries such as education and software. In 2010, America ran a trade surplus in services of nearly $150 billion.”-Mark Slaughter, Wall Street JournalFrom the quote above, we can glean the information that America has a very strong foothold in knowledge-intensive industries. To put this in economists’ speak, we have a strong case for saying that, as of 2010, the U.S. has a comparative advantage in knowledge-intensive industries.We can determine this because we know that labor is expensive in the United States, and yet it is stated we have a trade surplus of approximately $150 billion. Thus, the United States must have a comparative advantage to make such a profit in addition to affording the high cost of labor. Remember that policy can change the comparative advantage and that the comparative advantage can change over time; however, it is likely that the U.S. has this comparative advantage still in 2015. We can’t say that the U.S. has the absolute advantage in knowledge-intensive industries because we don’t have that information. Although we can’t draw a conclusion about absolute advantage, we can tell from this information that America has a comparative advantage in knowledge-intensive industries.II. Assumptions of Supply and DemandTo understand the assumptions of supply and demand, we must first understood what is meant by the term. Supply and demand is made up of markets and competition. Markets are voluntaryexchanges of buyers and sellers; it does not have to be in a physical location, as many markets are online. A competitive market is a market that has a high number of buyers and sellers. A perfectly competitive market is a market with so many buyers and so many sellers that the loss of one buyer or seller does not make a difference in the market. There are no monopolies, and buyers and sellers can come and go. This is the assumption we make about supply and demand;here we are assuming that no individual has the power to affect the market. The second assumption we make about supply and demand is that the buyers and sellers are rational people. Rational people are people who systematically and purposefully try to achieve objectives. They evaluate the costs and benefits of marginal analysis. Marginal analysis is an incremental adjustment to an existing plan. So, a rational buyer or seller will determine theadditional benefits and the additional costs of a product. Their objective does not matter, so long as their approach is systematic and purposeful.III. DemandDemand is simply the willingness to buy and the ability to buy. A person must have the want or need to buy a product and they must also have the ability, whether financial or otherwise. The quantity demanded (Qd) is a question that all buyers must ask themselves when making a purchase; that is, “at a given price, what do I want to pay”? Also important is the law of demand, which is the claim that the quantity (Qd) of a good falls when its price (P) rises, other things being equal (ceteris paribus). The law of demand simply means that when the price goes up, the quantity demanded goes down. Likewise, when the price goes down, the quantity demanded goes up. Notice that the relationship between price and quantity is inverse. An example of demand is shown in the table below; this table shows that Helen will buy varying amounts of coffee (Qd) depending on the prices of the lattes. If each latte costs $0, Helen will buy 16 lattes; if each latte costs $1, Helen will buy 14. As the price continues increasing, Helen’s coffee purchases decrease. This is also shown in the graph following the table. The table is known as the demand schedule for Helen’s coffee consumption, while the graph is known as the demand curve.Price of Lattes Qd of lattes0 161 142 123 104 85 66 4Thedemandschedulefor Helen’slattes. 4 8 12 160123456Demand Curve of LattesQd of LattesPrice of Lattes ($)IV. SatisfactionIn economics, satisfaction is also known as utility. There are multiple types of utility, and this is best described using an example about consumption. If a hungry consumer purchases a burger, then eating the first burger gives the consumer a lot of satisfaction utility. Now say they eat a second burger. This burger will not give as much extra satisfaction as the first one did, and the consumer will only experience marginal utility. Now assume they eat a third burger. This burgerwill give even less extra satisfaction than eating the second one, and this is known as diminishing marginal utility, where the consumer experiences decreasing incremental levels of satisfaction. Eventually, the consumer will get to a “puke point” where the satisfaction actually becomes negative and is detracting. This “puke point” is applicable to any product a consumer buys. This diminishing satisfaction is why the demand curve is always decreasing. V. Market Demand vs. Individual


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UT Knoxville ECON 201 - Supply and Demand

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