ECON 101 1st Edition Lecture 5Outline of Last Lecture I. Chapter 3 ApplicationII. 3.1 Comparative Advantage and exchangeIII. 3.2 MarketsIV. 3.3 Market Failure and the role of GovernmentV. Chapter 4 Supply and DemandOutline of Current Lecture I. The Demand CurveII. 4.4 Market effects of changes in demandIII. 4.2 The supply curveCurrent LectureI. 4.1 The demand curea. Ceteris paribus, demand rises as price falls because, among other thingsi. Ceteris paribus, other goods seem relatively expensive and so consumers substitute into the cheaper good and demand more of itii. Ceteris paribus, the amount of resources consumers have to spend of it unchanged so at lower prices they can buy more of everything; a price reduction is as good for consumers as is an increase in incomeb. Economists are always studying trade offs c. Now we’re going to look at the price and number of things that are going into the trade d. How much value is put into the items you’re trading (what your preferences are)i. This considered demande. Demand: thinking at the margin (small changes)i. Marginal utility the happiness you get from a small increase (i.e. one more beer)f. Law of Demand: marginal utility (MU) falls ass you get more units of the good (i.e. You like the first piece of pizza more than the second because you were more hungry when you ate the first one)i. That means the price you are willing to pay lowers as quantityincreasesii. The Law of Demand shows diminishing returnsiii. There is a negative relationship between price (P) and quantity demand (Q) (ceteris paribus)iv. Marginal benefit/ utility: equals the maximum you are willing to pay for this good at each Q (quantity)g. Individual demand curve: a curve that shows the relationship between the price of a good and quantity demanded by an individual consumer (ceteris paribus)h. Change in quantity demand: a change in the quantity consumers are willing and able to buy when the price changes; represented graphically by movement along the demand curvei. Market demand curve: a curve showing the relationship between price and quantity demanded by all consumers, ceteris paribusII. 4.4 Market effects of changes in demanda. Change in demand: a shift of the demand curve caused by a change in a variable other than the price of the product 1. No change in slope (tradeoffsinutility same) but I have more Law of demand Ceteris paribus income shift in D(Diminishing returns) if P ê Q demands é2. Substitutes have higher prices 3. Beer is cheaper 4. Change prefer.b.c. Increases in Demand shift the Demand curvei. Normal good: a good for which an increase in income increases demandii. Inferior good: a good for which an increase in income decreases demandiii. Substitutes: two goods for which an increase in the price for one good increases the demand for the other goodiv. Complements: two goods for which a decrease in the price of one good increases the demand for the other goodv. Demand curve can only shift left and rightd.Increases in demand shift the demand curvee. Decreases in demand shift the demand curvef. Know the above two charts for the exam or at least look them overIII. 4.2 The supply curvea. Law of Supply: under perfect competition, there is a positive relationship between price and quantity demanded, ceteris paribusb. Supply: thinking at the margin marginal cost (opportunity cost)c. In this chapter we assume diminishing returns to inputs I production (rising marginal costs as quantity increases)d. Marginal cost = MC = e. é Supply curve shows the minimum price you have to charge to coveryour marginal cost at each Q supplied (doesn’t apply to all markets but we will focus on this kind for now)f. Change in quantity supplied: a change in the quantity firms are willing and able to sell when the price changes; represented graphically by movement along the supply curveg. Minimum supply price: the lowest rice at which a product will be suppliedh. Why is the Market Supply Curve Positively Sloped?i. Individual firm: a higher price encourages a firm to increase its output by purchasing more materials and hiring more workersii. New firm: in the long run, new firms can enter the market andexisting firms can expand their producing facilities to produce more output even if the later entrants have higher costs so long as prices are also
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