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UConn ECON 1202 - Supply and Demand Principles

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Econ 1202 1st Edition Lecture 6Outline of Lecture 4 (Principles of Macroeconomics (continued)/ Production Possibilities Curve/ Markets, Trade, and the Law of Comparative Advantage)I. Economics, Incentives, and Rules of the GameII. How is a nation’s output measured?III. What determines a nation’s production “capabilities” or “possibilities”IV. Short Hand Formula: The Production FunctionV. Production Possibilities CurvesVI. MarketsVII. Trade Lowers CostsOutline of Lecture 5 (Markets, Trade, and the Law of Comparative Advantage (continued)/ Supply and Demand Principles)I. The Law of Comparative Advantage and David RicardoII. Markets and Institutional Frameworka. Define private property rightsIII. Introduction to Supply and DemandIV. Demanda. Demand Curveb. Law of Demandc. Demand “Shifters”Markets, Trade, and the Law of Comparative Advantage (continued)I. The Law of Comparative Advantage and David Ricardoa. Comparative Advantage is the ability of an individual, firm, or country to produce a good or service at a lower opportunity cost than its competitors.i. To increase the wealth of country, it should produce goods and services that it can make at a low cost and then trade for goods and services that would cost them high prices to produce.b. The law states that a country should specialize in the production of goods or services that it has comparative advantage in and then trade with other countries who specialize in other goods and services.c. Absolute Advantage is when an individual, firm, or country can produce more of a certain good or service as compared to another individual, firm,or country producing that same good or service.II. Markets and Institutional Frameworka. Markets are socially constructedb. For markets to work well, private property rights must be protectedi. Private Property Rights are:1. The right to use goods and services2. The right to exclude goods and services3. The right to transfer goods and servicesii. Types or property1. Real Property (your house)2. Personal Property (your car)3. Intellectual Property (your ideas)iii. Your private property rights must clearly be clearly stated that youown them and must protect themiv. United States Institutions that try to protect private property rights:1. State and Federal Institutions (Independent Court System, Enforcement of Rights)2. U.S. Constitution3. 5th and 14th Amendments4. Copyrights and PatentsSupply and Demand PrinciplesIII. Introduction to Supply and Demanda. The interaction of supply and demand determine pricesi. Demand=valueii. Supply=costb. Prices reflect the consumer’s valuation and the supplier’s cost structureIV. Demanda. The Demand Curve shows the relationship between quantity demanded of a good or service at various pricesb. Law of Demand states that the lower the price of a good or service, the higher the quantity demanded of that good or service (and vice versa) holding all else constant.i. Ceteris Paribus-given everything else constant; meaning we want to isolate the effect one the one thing we are looking at without worrying about other outside effects as well.c. Demand “Shifters” cause increases and decreases in demand, and therefore, cause a change in demandi. Income changes: if you make more money, you are likely to go out to eat more.ii. Prices of substitutes: if the price of Coca-Cola goes up, you are more likely to buy Pepsi.iii. Prices of compliments: if the price of hotdogs goes up, you are less likely to buy ketchup.iv. Consumer tastes: if Apple releases a new iPhone, the demand for an old iPhone will go down.v. Expected future prices: if you think the price of gas will go up in the next two months, you are less likely to buy a car now.vi. Demographic changes: if there is an increase in the amount of Mexicans in an area, there will be an increase in the amount of taco shops.Demand Curve with an increase due to some kind of demand shifterPriceQuantityD1


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