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UA EC 110 - The Demand and Supply Model, Part I
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ECON 110 1st EditionLecture 5Outline of Last Lecture I. Opportunity cost reviewII. Absolute advantageIII. Comparative advantage--trade and specializationIV. Questionsa. Why do people and nations choose to be economically independent?b. How can trade make everyone better off?c. What is absolute advantage?d. What is comparative advantage?e. How are they similar/different?V. Interdependencea. Why do countries trade?b. How to comparative/absolute advantage affect trade?c. Examplesi. Law Businessii. Japan vs. U.S. ProductionOutline of Current Lecture I. Demand and Supply Modela. Method of understanding the interactions of buyers and sellers in market settingsb. Help determine market price and quantity.c. How do changes affect markets?II. Marketsa. Necessary elementsi. Buyersii. Sellersb. Buyer/Seller Behavior: Price Takers i. Example: Uber cars ii. Example: Gas StationsIII. Demand a. Demand Equasion: QD X= f (PX, I, PO, T, E, X)These notes represent a detailed interpretation of the professor’s lecture. GradeBuddy is best used as a supplement to your own notes, not as a substitute.i. Variables1. Px : price of the product2. I : income3. PO : Prices of other goods4. T : Tastes or preferences for a good5. E : Expectations about future events6. X : Possible other market specific variablesa. Temperatureb. Media ii. We divide the variable into two groups: Price (Px), and everything else.b. Demand schedule and demand curvei. Demand curve: a graphic representation of the relationship between demand (quantity demanded) and the market price. ii. Law of Demand: When prices rise, buyers purchase fewer units, and when pricesfall, they buy more. 1. Reliable2. Implied inverse relationship between supply and demand.a. Change in quantity demandedi. Cause by a change in the priceii. Implies a movement along a demand curve.b. Change in Demandi. Caused by a change in any other variable in playii. Implies a shift in the demand curvec. Demand Shiftersi. Change in income1. Normal or inferior goods (ramen)2. Does demand rise or fall?ii. Change in other prices1. Complements or substitutes2. Does demand rise or falliii. Changes in taste/expectationsCurrent Lecture – The Demand and Supply Model, Part IRon exampleRon can wash 3 cars or mow 1 lawn in 2 hours. Tom can wash 4 cars or mow 2 lawns in 2 hours. - Ron has no absolute advantage (Tom can produce more cars than Ron in 2 hours, and Tom can mow more lawns than Ron in 2 hours.) - In terms of lawns, Tom has the comparative advantage, because his opportunity cost for a lawn is 2 cars, while Ron’s cost for a lawn is 3 cars. Tom is giving up less in order to mow a lawn, giving him comparative advantage.- In terms of cars, Ron has comparative advantage because his opportunity cost for a carwash is 1/3 of a lawn, while Tom’s opportunity cost for a car wash is ½ a lawn. Since 1/3 is less than ½, Ron has the comparative advantage because his opportunity cost (what he is giving up) is less than Tom’s opportunity cost to wash a car.U.S. Japan example revisited- U.S. has absolute advantage in both wheat and computers. It can produce 5000 tons of wheat, or 500 computers. We assume it will split labor between the two, and produce 2500 tons of wheat and 250 computers.- Japan can produce 2000 tons of wheat or 300 computers. Japan also splits labor and produces 1000 tons of wheat and 150 computers.- The U.S. has comparative advantage in wheat, because the opportunity cost for a ton of wheat is.10 computers, while Japan’s opportunity cost for wheat is .67 computers. - Japan has comparative advantage in computers, because its opportunity cost for a computer is 5 tons of wheat, while the same cost for the U.S. is 10 tons of wheat.- Let’s assume they tradeo Now the U.S. will produce 3200 tons of wheat and 180 computers, importing 110 computers from Japan, and exporting 700 tons of wheat to Japan. Now they will have 290 computers and 2500 tons of wheat. The benefits for the U.S. is + 30 computers.o Now Japan will produce 240 computers and no wheat, importing 700 tons of wheat fromthe U.S. and becoming dependant on the U.S. for Wheat. Meanwhile they will export 110 computers, leaving them with 130 computers and 700 tons of wheat. The benefits from the trade for Japan are +10 computers and +100 tons of wheat. - Trade is the really beneficial thing for both countries!The Supply and Demand ModelThe supply/demand model is our method of understanding the interactions of buyers and sellers in market settings. The main idea of this model is to help determine market price and quantity, and answer questions such as “how do changes affect markets?” The necessary elements to create a market are buyers and sellers; that’s it. It does not matter whether the market is in a store, online, or in a back alley—where there are buyers and sellers, economists are looking at a market.The supply/demand model also allows economists to observe and track buyer/seller behavior in order tosee patterns and create economic theories. One thing they track is price taking, which is when a competing business observes the prices of their competition, and then they lower their prices to undercut the competition. For example, Uber Cars are currently making a dent in the taxi market by being more utilitarian (by using an app to locate you and send the nearest car) and having lower prices.When economists discuss demand, a common subject is the demand equasion: QD X= f (PX, I, PO, T, E, X)In this equasion, Px is the price of the product in question, I is income, Po represents the prices of other products that could affect the market in question, T stands for consumer tastes or preferences for a good, E symbolizes expectations about future events (for example if consumers believe that prices on a object will be lowered the next month,) and finally X is all other possible variables that could affect the market, such as temperature or media popularity (popsicles sell better in the summer because of the warmer temperatures, TOMS shoes started selling well with a lot of celerity endorsement, etc.)Economists divide the variables into two groups: price (Px), and everything else. Price is most important, which is why it’s by itself. From this data, economists can talk about demand schedule and demand curves. A demand curve is a graphic representation of the relationship between demand (quantity demanded) and the market price. Law of Demand: When prices rise, buyers purchase fewer


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UA EC 110 - The Demand and Supply Model, Part I

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