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Consumer Demand andSupply
Week: 2
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A MarketInteraction between
buyers and sellers
Buyers demand goods
Sellers supply goods
AssumptionsStandardized good
Competitive market
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DemandSchedule or curve
Amount consumerswilling and able to
purchase at a given price
Other things eualIndividual demand
Market demand
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!aw o" DemandOther things eual# as
price "alls uantitydemanded rises
$%planations&Diminishing marginal
utility
Income e'ect
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Individual Demand 6
5
4
3
2
1
010 20 30 40 50 60 70 80
Quantity Demanded !us"els per #eek$
% r i & e
p e r ! u s
" e l $
% Qd'5
4
3
2
1
10
20
35
55
80
Individual
Demand
%
Q
D
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Determinants o" DemandIncome*ormal goods
In"erior goods+rice o" related goodsSubstitute good
Complementary good,nrelated goods
Consumer e%pectations
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Individual Demand 6
5
4
3
2
1
0
Quantity Demanded !us"els per #eek$
% r i & e
p e r ! u s
" e l $
% Qd'5
4
3
2
1
10
20
35
55
80
Individual
Demand
%
Q
D1
2 4 6 8 10 12 14 16 18
Demand Can Increase or Decrease
Decrease in Demand
D2
D3
Change inDemand
Change inQuantity
Demanded
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SupplySchedule or curve
Amount producerswilling and able to sell at
a given price
Individual supply
Market supply
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!aw o" SupplyOther things eual# as
price rises the uantitysupplied rises
$%planations&-evenue implications
Marginal cost
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Individual Supply 6
5
4
3
2
1
0
Quantity Supplied !us"els per #eek$
% r i & e
p e r ! u s
" e l $
% Qs'5
4
3
2
1
60
50
35
20
5
Individual
Supply
%
Q
S1
10 20 30 40 50 60 70
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Determinants o" Supply-esource prices
)echnology
)a%es and subsidies+rices o" -elated goods
Substitute in +roduction . i" price o" energy gel rises# /rms switch production "rom bars to gel0 )he SS o"
energy bars decreases01 Complements in +roduction
. i" price o" Bee" rises# supply o" cowhide increases01
+roducer e%pectations
*umber o" sellers
)he State o" *ature
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Individual Supply 6
5
4
3
2
1
0
Quantity Supplied !us"els per #eek$
% r i & e
p e r ! u s
" e l $
% Qs'5
4
3
2
1
60
50
35
20
5
Individual
Supply
%
Q
S1
Supply Can Increase or Decrease
S2
S3
10 20 30 40 50 60 70
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Individual Supply 6
5
4
3
2
1
0
Quantity Supplied !us"els per #eek$
% r i & e
p e r ! u s
" e l $
% Qs'5
4
3
2
1
60
50
35
20
5
Individual
Supply
%
Q
S1
Supply Can Increase or Decrease
S2
S3
10 20 30 40 50 60 70
Change inQuantity Supplied
Change inSupply
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$%ercise 2
)he demand schedules o" three individuals3)om# Dick# and 4arry5 are shown0 I" they arethe only three buyers o" D6Ds# complete themarket demand schedule "or D6Ds0
7raphically# is the market demand "or aproduct the horizontal or vertical sum o" theindividual demand schedules8
9uantity demanded# D6Ds+rice )om Dick 4arry )otal:2;0<< 2 = < >>>>> 2?0<<? ; 2 >>>>> 220<<@ @ ; >>>>> 0<< 2< 2< >>>>>
0<< 2; 2@ >>>>>
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Answer 2 )he market demand is the horizontal
sum o" the individual schedules0
9uantity demanded# D6Ds+rice )om Dick 4arry )otal:2;0<< 2 = < ;2?0<<? ; 2
220<<@ @ ; 20<< 2< 2< 0<< 2; 2@ ?
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$%ercise
("e demand )or i&e*&ream &onesis%+800*2Qd ,- ./- 1
rom t"is ./- prepare DDs&"edule and dra# t"e DD &urein a rap"
)he Supply o" iceEcream cones is+F<< G 29s H0 $0 (rom this $0 prepare SS schedule anddraw the SS curve in the same graph
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Market $uilibrium$uilibrium price and uantity
Surplus and shortage +rice as a -egulator
$cient allocation+roductive eciency
Allocative eciency
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+roductive vs allocative eciency+roductive eciency can be de/ned as
producing goods and services "or the lowestcost0 +$ is said to occur on the ++(0 On the ++(curve# it is impossible to produce more o" onegood without producing less o" another0
%oint C in rap" is produ&tielyine&ient !e&ause you &an
produ&e more oods orseri&es #it"out anopportunity &ost-
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+roductive vs allocative eciencyAllocative eciency is more concerned with the distribution and allocation o" resources in society0
(or e%ample# there is no point in being productively ecient i" all resources are diverted to making guns0
Je could be producing on a ++( but# i" it is all guns# society may not have enough "ood and health care0
An anecdote& the Soviet ,nion under Communist days tells how "actories were given targets to produce certainuantities o" goods0 )hey o"ten did this with great vigor and were productively ecient# but# o"ten they wereproducing goods which werenKt needed by society0
A$ looks at the marginal bene/t 3MB5 o" consumption compared to marginal cost 3MC50A$ will occur when MBF MC0
Je can assume price F MC0 So we also say
A$ occurs where price F MC0
Monopolies are o"ten said to be allocatively inecient because they are able to set the priceL MC 0
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Market $uilibrium 6
5
4
3
2
1
02 4 6 8 10 12 14 16 18
us"els o) Corn t"ousands per #eek$
% r i & e
p e r ! u s " e l $
% Qd
'5
4
3
2
1
2000
4000
7000
11000
16000
Market
Demand
200 Buyers
% Qs
'5
4
3
2
1
12000
10000
7000
4000
1000
Market
Supply
200 Sellers
200 Buyers & 200 Sellers
7
3
D
S
$4 Price Floor
6,000 u!hel Surplu!
$2 Price Ceiling
",000 u!hel Shortage
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Market $uilibriumChange in demandShi"t o" the demand curve
Change in supplyShi"t o" the supply curve
Change in euilibrium priceand uantity
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Market $uilibrium
Supply increaseDemand decrease
Supply decreaseDemand increaseSupply increase
Demand increaseSupply decreaseDemand decrease
%ri&eQuantity
8
8
8
8
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7overnmentESet +rices+rice ceilings ongasoline-ationing problemBlack markets
-ent controls+rice Noors on wheatOptimal allocation o"resources
mpor an e n ons or
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mpor an e n ons or$%am
demanddemand schedulelaw o" demanddiminishing marginal utilityincome e'ect
substitution e'ectdemand curvedeterminants o" demandnormal goods
in"erior goodssubstitute goodcomplementary goodchange in demandchange in uantity
demanded
supplysupply schedulelaw o" supplysupply curve
determinants o" supplychange in supplychange in uantity
supplied
euilibrium priceeuilibrium uantitysurplusshortageprice ceiling
price Noor
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