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UA EC 110 - Supply and Equilibium

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ECON 110 1st EditionLecture 6Outline of Last 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 elementsb. Buyer/Seller Behavior: Price Takers III. Demand a. Demand Equasion: QD X= f (PX, I, PO, T, E, X)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 variablesii. 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. iii. Implied inverse relationship between supply and demand.1. Chang in quantity demandedThese 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.a. Cause by a change in the priceb. Implies a movement along a demand curve.2. Change in Demanda. Caused by a change in any other variable in playb. Implies a shift in the demand curvec. Demand Shiftersi. Change in incomeii. Change in other pricesiii. Changes in taste/expectationsOutline of Current Lecture I. Clicker Question ExampleII. Supplya. Supply Functionb. Law of Supplyc. Constructing the supply curvei. Supply Shiftersii. ExampleIII. Equilibriuma. Surplusb. ShortageCurrent Lecture – Supply and EquilibriumExamples: Question:Which of the following does not cause a shift in demand for hamburgers? A. A change in the price of hotdogs,B. A change in the price of hamburger buns,C. A change in the he price of hamburgers,D. A change in income.Answer: A. A change in the price of hotdogs will cause a shift in the demand curve because it willmake hotdogs more desirable than hamburgers, causing demand for hamburgers to decrease.B. A change in the price of hamburger buns could shift demand by making hamburgers more expensive.NOTE: TEST INFORMATION45 questions, all multiple choice. - 29 regular(2pts each), - 16 problem based (3 pts each)Bring ID, pencil, eraser, basic calculator (no phones)Chapters 1-41. Trade offs, scarcity--no need to memorize ten basic principles!2. Scientific method(assumptions), models (circular flow, ppf, micro vs. macro, positive vs. normative)3. Absolute and comparative advantage:trade and specialization 4. Demand and supply model, demand curve, supply curve, equilibriumChapters 3 and 4 will make up the majority of the test!C. A change in the price of hamburgers does not shift the demand curve because by the law of demand we now that a change in price causes movement along the demand curve, but not a shift of the curve itself. D. A change in income could cause people to buy more or less hamburgers, therefore shifting the demand curve. Time to talk about the other side of the supply/demand model: supply. Supply is determined by price and quantity. The supply equation is similar to the demand equation, with two sets of variables: price, and all others. Law of Supply: when the prices rise, suppliers offer more units and when prices fall, theyoffer fewer.Similar to the Law of Demand, the law of supply was named because it is very reliable based on observations and research. It also shows that there is a direct relationship between price and quantity supplied, meaning that a change in the quantity supplied would be caused by a change in the price (and causing a movement along the supply curve.) A change in supply could be caused by any other variable changing, and implies a shift in the supply curve.A supply curve is a graphic representation of the relationship between the quantity supplied and the market price. To graph one, make sure to place price on the vertical axis, and quantity on the horizontal axis. As stated above, a change in the price will cause movement along the supply curve, while a change in any other variables with cause a shift in the curve. These other variables, then, are called supply shifters.Example: Question:If the price of leather increases, will the supply curve for shoes shift, and in what direction?Answer:The supply curve for shoes will shift left. The price of leather does not change demand for shoes, but it would increase the price of shoes, which would decrease demand, which would decrease supply. (Decrease in supply means moving left on the horizontal axis.)The last topic in this module is equilibrium. Equilibrium exists when there is a balance achieved between the two sides of the market; aka, the quantity that buyers are willing to buy equals the quantity made available by sellers. There is a single price, for currents conditions, at which this is true. In the case of non-equilibrium, either the price is above or below the equilibrium level. Ifthe price is above the equilibrium level, that means that buyers want to buy less and sellers want to sell more than at equilibrium. When the quantity demanded is less than the quantity supplied, this is called a surplus. When the quantity demanded is greater than the quantity supplied, this is termed a


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