MODEL OF DEMAND
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Transcript of MODEL OF DEMAND
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Demand
Willingness to Pay - is the maximum amount a person would be willing to pay, sacrifice or exchange for a good
Consumer Surplus – the value to a consumer of consumption of a good, minus the price paid
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Demand
Diminishing marginal value – the value of last unit consumed declines as the number consumed rises
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MODEL OF DEMANDThe model of demand is an attempt to
explain the amount demanded of any good or service.
DEMAND DEFINED
The amount of a good or service a consumer wants to buy, and is able to buy per unit time.
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THE DEMAND CURVE
The demand curve for any good shows the quantity demanded at each price, holding constant all other determinants of demand.
The DEPENDENT variable is the quantity demanded.
The INDEPENDENT variable is the good’s own price.
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THE LAW OF DEMAND
The Law of Demand says that a decrease in a good’s own price will result in an increase in the amount demanded, holding constant all the other determinants of demand.
The Law of Demand says that demand curves are negatively sloped.
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A DEMAND CURVE
A demand curve must look like this, i.e., be negatively sloped.
own price
quantity demanded
demand
Market for tacos
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Demand slide 7
The demand curve means:You pick a price, such a p0, and the demand curve shows
how much is demanded.own price
quantity demanded
demand
p0
Q0
Market for tacos
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Demand slide 8
What if the price of tacos were less than p0?
How do you show the effect on demand?
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Demand slide 10
Suppose people want to buy more of a good when incomes rise, holding constant all other factors affecting demand, including the good’s own price.
own price
quantity of beer
demand @ I = $1000
Market for beer
How does this affect the demand curve?
$1/can
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Demand slide 12
Normal and inferior goods defined
Normal good: When an increase in income causes an increase in demand.
Inferior good: When an increase in income causes a decrease in demand.
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Demand slide 13
Substitutes defined
Substitutes: Two goods are substitutes if an increase in the price of one of them causes an increase in the demand for the other.
Thus, an increase in the price of pizza would increase the demand for spaghetti if the goods were substitutes.
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Demand slide 14
Complements defined
Complements: Two goods are complements if an increase in the price of one of them causes a decrease in the demand for the other.
Thus, an increase in the price of pizza would decrease the demand for beer if the goods were complements.
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DEMAND SUMMARY
Demand is a function of own-price, income, prices of other goods, and tastes.
The demand curve shows demand as a function of a good's own price, all else constant.
Changes in own-price show up as movements along a demand curve.
Changes in income, prices of substitutes and complements, and tastes show up as shifts in the demand curve.
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Supply slide 16
MODEL OF SUPPLYThe model of supply is an attempt to explain
the amount supplied of any good or service.
SUPPLY DEFINEDThe amount of a good or service a firm wants
to sell, and is able to sell per unit time.
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YOU COULD WRITE THE MODEL THIS WAY:
The supply function for tacos
QS(tacos) = S(Ptacos, Ptaco shells, Plettuce, Plabor, Ptomatoes, . . . ,technology, taxes &
subsidies)
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THE SUPPLY CURVE
The supply curve for any good shows the quantity supplied at each price, holding constant all other determinants of supply.
The DEPENDENT variable is the quantity supplied.
The INDEPENDENT variable is the good’s own price.
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THE LAW OF SUPPLY
The Law of Supply says that an increase in a good’s own price will result in an increase in the amount supplied, holding constant all the other determinants of supply.
The Law of Supply says that supply curves are positively sloped.
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A SUPPLY CURVE
A supply curve must look like this, i.e., be positively sloped.
own price
quantity supplied
supply
TACO MARKET
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The supply curve means:
You pick a price, such a p0, and the supply curve shows how much is supplied.
own price
quantity supplied
supply
p0
Q0TACO MARKET
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own price
quantity supplied
supply
p0
Q0
TACO MARKET
If the price of tacos rises, how is the supply curve affected?
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Other factors affecting supply
The question here is how to show the effects of changes in input prices, technology, and taxes.
The answer, of course, is that changes in input prices, technology, or taxes cause the supply curve to shift.
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Changes in input prices
Consider the supply of beer, and suppose the price of hops, a crucial input to beer, falls. Beer firms now find that beer production is more profitable than it was before, and they respond to this be increasing the supply of beer.
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The price of hops falls from $300 per ton to $100 per
ton.
own price
quantity
supply @ hops price of $300/ton
BEER MARKET
How will this affect the supply curve for beer?
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Change in technology
An improvement in technology makes it possible to produce a level of output with fewer inputs than before.
Because this lowers the cost of production, profits rise, and firms will try to supply more.
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Supply slide 29
own price
quantity
supply @ old technology
BEER MARKET
Suppose beer technology improves.
How does this affectthe supply curve for beer?
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Supply slide 31
price
Q
S (no tax)
How would you suspect an excise tax affects the supply of a good?
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Supply summary
Supply is a function of own price, input prices, and technology.
The supply curve shows supply as a function of own price, all else constant.
Changes in a good’s own price show up as movements along a supply curve.
Changes in input prices, technology, or taxes show up as shifts in the supply curve.