# MSU EC 201 - Chap3 (37 pages)

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## Chap3

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## Chap3

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Pages:
37
School:
Michigan State University
Course:
Ec 201 - Introduction to Microeconomics
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Krugman and Wells Chapter 3 Steven J Haider EC201 Spring 2015 Where we re going This chapter introduces one of our central models perfect competition or supply and demand or a competitive market This chapter quickly lays out the pieces so we can start to use the model Later chapters will develop the pieces in more detail The model is relatively simple and applicable to a large number of markets The key assumption there are a large number of suppliers demanders so that no individual supplier demander can affect the price Suppliers and demanders are price takers Model probably works well for cotton Model probably works poorly for computer operating systems We will discuss the cotton market throughout this chapter following the book p2 Key components The Demand Curve Tells us how much consumers are willing to buy at each price Demand is downward sloping The Supply Curve Tells us how much a firm is willing to sell at each price Supply is upward sloping Shifting vs moving along a curve Equilibrium The model s prediction for the resulting price and quantity transacted in the market p3 Demand Quantity demanded Refers to the amount demanded at one particular price Demand Answers the question what is the quantity demanded at every price Price changes is key to market outcomes so we consider this from the start NOTE text leaves off the underlined piece I think it is an important addition to distinguish from quantity demanded NOTE Quantity demanded vs demand is an arbitrary but very important naming convention Two representations of demand Demand Schedule table form Demand Curve the graph of the demand schedule p4 Demand example Demand schedule is table Quantity demanded at 2 00 is 7 1b pounds Demand is dark blue curve p5 Demand using the model Law of Demand Quantity demanded is higher when prices are lower other things equal or demand curves slope downward This finding is so common we call it a law Shifts in demand Demand curve shows different quantities demanded for all prices holding all else equal What might shift demand Change in tastes for example Movements along the demand curve If just price is changing perhaps dropping because of excess supply the demand curve doesn t shift we just move along it The demand curve already tells us the quantity demanded at every price When an economist says demand for X changed we mean the demand curve shifted p6 Demand shifts Demand increased or demand shifted out At every price the quantity demand is greater in 2010 vs 2007 Explanations Population growth increased popularity of cotton clothing p7 Demand shifts vs movements Shift Example D1 to D2 Interpretation at every price like 1 50 the quantity demanded is greater compare A to C Possible explanation tastes changed Movement along Example A to B along D1 Interpretation as price dropped 1 50 to 1 00 qnty demanded increased 8 1b to 10b pounds p8 Demand more on shifts Increases vs decreases in demand Increase to the right Decrease to the left Think about it as at any given price 1 2 3 4 5 Things that shift the demand curve Price of related goods services Changes in income Changes in tastes Changes in expectations Changes in the number of consumers p9 Demand shifters Changes in prices of related goods Substitutes complements in consumption Substitutes goods that take the place of the good of interest A decrease increase in the price of a substitute good will decrease increase the demand for a given good Example a decrease in the price of tea will decrease the demand for coffee Complements goods that enhance the good of interest A decrease increase in the price of a complement good will increase decrease the demand for a given good Example a decrease in the price of muffins will increase the demand for coffee p10 The picture subs vs comps PB Substitutes PA D1 A is hot dogs B is hamburgers D2 QB DB D PB QA PA QDA Complements A is hot dogs B is hot dog buns NOTE If the price went up for good A then all arrows switch D2 D1 DB QB p11 Demand shifters Changes in tastes A greater lesser taste for a good increases decreases demand Example see previous slides for 2007 vs 2010 cotton Changes in income Normal good an increase decrease in income will increase decrease the demand for a normal good Most goods are normal goods Inferior good an increase decrease in income will decrease increase the demand for an inferior good Example Chipotle lunch normal vs Taco Bell lunch inferior p12 The picture normal vs inferior P Inferior D1 Taco Bell for me D2 Income Q D P Normal Chipotle for me D2 D1 NOTE If income went down then all arrows switch D Q p13 Demand shifters Changes in expectations We respond to future expectations for income and prices Expected decrease increase in price decreases increases demand today Example A new iPad is rumored to be available in May Changes in the number of consumers More less consumers increases decreases demand Example population movements to CA increased demand for housing p14 Demand individual demand The idea behind the last point is hopefully pretty clear but The demand curve thus far is the market demand curve Individual demand curve the quantity demanded at each price for an individual Market demand is the horizontal sum of individual demand At 30 Darla wants 3 and Dino wants 2 so market demand is 5 p15 Supply Quantity supplied Refers to the amount supplied at one particular price Supply Answers the question what is the quantity supplied at every price Price changes is key to market outcomes so we consider this from the start NOTE text leaves off the underlined piece I think it is an important addition to distinguish from quantity supplied NOTE Quantity supplied vs supply is an arbitrary but very important naming convention Two representations of supply Supply Schedule table form Supply Curve the graph of the supply schedule This slide should look very familiar p16 Supply example Supply schedule is table Quantity supplied at 1 50 is 11 2b pounds Supply is red curve And this slide too p17 Supply using the model Law of Although demand curves are almost always downward sloping real supply curves need not be upward sloping We start with the upward sloping case but we do not declare it a law Shifts in supply A supply curve shows the quantities supplied for all prices holding all else equal What might shift supply A new firm country starts production Movements along the supply curve If just price is changing perhaps dropping because of excess supply the supply curve doesn t shift The

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