Krugman and Wells Chapter 3Where we’re goingKey componentsDemandDemand: exampleDemand: using the modelDemand: shiftsDemand: shifts vs. movementsDemand: more on shiftsDemand: shiftersThe picture: subs vs. compsDemand: shiftersThe picture: normal vs. inferiorDemand: shiftersDemand: individual demandSupplySupply: exampleSupply: using the modelSupply: shiftsSlide Number 20Supply: shiftersSupply: shiftersPutting the pieces together…Slide Number 24Let’s pauseExample: the muffin marketMuffin supply and demandMuffin equilibriumMuffin example conclusionsChanges in supply and demandA shift (out) in the demand curveA shift (in) in the supply curve RecapTwo events: view 1Two events: view 2Some things to note 1Some things to note 2Krugman and Wells Chapter 3 Steven J. Haider EC201 Spring 2015p2 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 bookp3 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 marketp4 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 schedulep5 Demand: example Demand schedule is table Quantity demanded at $2.00 is 7.1b pounds Demand is dark blue curvep6 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”p7 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 clothingDemand: 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) p8p9 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” Things that shift the demand curve 1. Price of related goods/services 2. Changes in income 3. Changes in tastes 4. Changes in expectations 5.Changes in the number of consumersDemand: 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 p10The picture: subs vs. comps p11 PA↓ ⇒ QDA ↑ DB ↑ Substitutes A is hot dogs B is hamburgers DB ↓ Complements A is hot dogs B is hot dog buns NOTE: If the price went up for good A, then all arrows switch… PA QB QB QA PB PB D1 D2 D2 D1 DDemand: 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) p12The picture: normal vs. inferior p13 Income ↑ D ↑ Inferior Taco Bell for me D ↓ Normal Chipotle for me NOTE: If income went down, then all arrows switch… Q Q P P D2 D1 D1 D2Demand: 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 p14p15 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
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