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Chapter 3

Chapter 3. Supply and Demand: In Introduction. Basic Economic Questions to Answer. What: variety and quantity How: technology For whom: distribution. To answer the questions:. Economic Systems: Centrally Planned Economy Free Market Economy Mixed Economy. Market Economy.

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Chapter 3

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  1. Chapter 3 Supply and Demand: In Introduction

  2. Basic Economic Questions to Answer • What: variety and quantity • How: technology • For whom: distribution

  3. To answer the questions: • Economic Systems: • Centrally Planned Economy • Free Market Economy • Mixed Economy

  4. Market Economy • the allocation for resources is determined by supply and demand • Demand: the buying force • Supply: the selling force

  5. Demand: the definition • The quantity of a good or service consumers’ are willing and able to buy at various prices • willingness and ability to buy • willingness: need - necessity • want – desire • ability: purchasing power

  6. Demand: the model • Variables: prices, quantity demanded • Assumption: other things equal • Hypothesis: (the law of demand) • Other things equal, a higher price leads to a smaller quantity demanded and a lower price results in a larger quantity demanded • Forecast / test / accept – the law

  7. Demand: key points • Demand is a relationship between quantity demanded and product price • Qd = f (P) • quantity demanded is a function of price • quantity demanded is determined by price • The law of demand: • Qd and P are negatively related • Demand Curve: downward sloping • Market demand: the sum of individual demand

  8. Demand Curve:Change in Qd and The Law of Demand • Other things equal, higher price for a good leads people to demand a smaller quantity of the good.

  9. Assumption: Other Things Equal • the other things: factors affecting D • --price of related goods • complements vs. substitutes • --income: normal vs. inferior • --preference • --expectations (prices, income, …) • --population • --others

  10. Qd vs. D • Qd: a number, a corresponding point on the curve • Change in Qd: movement along a curve, caused by change in price only • D: a relationship, a curve • Change in D: a shift of the entire curve, caused by change in other things

  11. An Increase in Demand

  12. Movement Along the Demand Curve vs. Shift of the Demand Curve

  13. Shifts of the Demand Curve

  14. Supply: the definition • The quantity of a good or service producers are willing and able to sell at various prices • willingness and ability to sell willingness: profitability ability: production capacity

  15. Supply: the model • Variables: prices, quantity supplied • Assumption: other things equal • Hypothesis: (the law of supply) • Other things equal, a higher price leads to a larger quantity supplied and a lower price results in a smaller quantity supplied • Forecast / test / accept  the law

  16. Supply: Key Points • Supply is a relationship between price and quantity supplied • Qs = f (P) • Quantity supplied is a function of price • quantity supplied is determined by price • The Law of Supply: Qs and P are positively related • Supply Curve: upward sloping • Market supply: the sum of individual supply

  17. The Supply Curve: change in Qs and the law of supply

  18. Assumption: Other Things Equal • the other things: factors affecting S --prices of inputs goods used to produce other goods --price of related goods goods that use the same resources --technology --expectations --others

  19. Qs vs. S • Qs: a number, a corresponding point on the curve • Change in Qs: movement along a curve, caused by change in price only • S: a relationship, a curve • Change in S: a shift of the entire curve, caused by change in other things

  20. Movement Along the Supply Curve vs. Shift of the Supply Curve

  21. A Decrease in Supply

  22. Shifts of the Supply Curve

  23. The Market: • Equilibrium • Change in D and impacts on Pe and Qe • Change in S and impacts on Pe and Qe

  24. Market Equilibrium

  25. Surplus

  26. Shortage

  27. Equilibrium and Shifts of the Demand Curve

  28. Equilibrium and Shifts of the Supply Curve

  29. Simultaneous Shifts of the Demand and Supply Curves

  30. Effects of the “War on Drugs”

  31. --prices of inputs (goods used to produce other goods) --price of related goods (goods that use the same resources) --technology --expectations --others Change in D & S --price of related goods complements vs. substitutes --income: normal vs. inferior --preference --expectations (prices, income, …) --population --others

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