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UConn ECON 1202 - (Supply and Demand Principles (continued)

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ECON 1202 1st Edition Lecture 6 Outline 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”Outline of Lecture 6 (Supply and Demand Principles (continued))I. Supplya. Supply Curveb. Shifts in SupplyII. Demand and Supply “Mechanics”III. Increase/Decrease in Demand (no change in supply)IV. Increase/Decrease in Supply (no change in demand)V. Demand and Supply Change SimultaneouslySupply and Demand Principles (continued)I. Supplya. The Supply Curve shows the relationship between the quantity supplied of a good or service at various prices.i. The quantity supplied of a good or service is the amount of that good or service that a seller is willing, and able, to sell at a particular price.b. Shifts in Supply either increase (to the right because the cost to produce the good is falling) or decrease (to the left because it costs more to produce than it is worth) supplyi. Supply Shifters:1. Technological Progress and Innovations2. Changes in the overall structure of input pricesa. Both relate to the structure of production costs3. Expectations4. Increase or decrease in the number of producers5. Changes in opportunity costsa. Prices of substitutes in production II. Demand and Supply “Mechanics”a. Equilibrium: Qd=Qs at Pei. Meaning: the quantity demanded equals the quantity supplied at the expected priceb. Excess Demand: Qd>Qs at P1i. Meaning: the quantity demanded is greater than the quantity supplied at a certain priceii. This results in a shortage in which there is too much demand and not enough being supplied1. Prices will increase, quantity demanded will decrease, and quantity supplied will increasec. Excess Supply: Qs>Qd at P1i. Meaning: the quantity supplied is greater than the quantity demanded at a certain priceii. This results in a surplus where there is no demand for the product and there is too much supply1. Prices will decrease, quantity demanded will increase, and quantity supplied will decreaseIII. Increase/Decrease in Demand (no change in supply)a. Increase in DemandPriceSP2P1D1 D2Quantityb. Decrease in DemandIV. Increase/Decrease in Supply (no change in demand)a. Increase in SupplyPriceSP1P2D2QuantityQ1 Q2 D1PriceS1S2P1P2b. Decrease in Supply c. Rationing=value less, demand decreasesd. Incentives=value more, demand increasesV. Demand and Supply Change Simultaneouslya. The price will remain unchanged if they are changing at the same direction and magnitudeQ1QuantityDQ2S2S1PriceQuantityP1P2Q2


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UConn ECON 1202 - (Supply and Demand Principles (continued)

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