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Economics 1

Economics 1. Paul Samuelson. Basic Elements of Supply and Demand. Demand - refers to the quantity of goods and services that consumers are willing and able to buy at different levels of price. Law of Demand.

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Economics 1

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  1. Economics 1 Paul Samuelson

  2. Basic Elements of Supply and Demand • Demand- refers to the quantity of goods and services that consumers are willing and able to buy at different levels of price

  3. Law of Demand • When price increases, quantity demanded decreases. When price decreases, quantity demanded increases, ceteris paribus • All other factors held constant • All thing things are equal.

  4. Quantity demanded tends to fall when price rises because: • 1. Substitution effect • 2. Income effect

  5. Factors Affecting Demand • 1. Consumer Income • 2. Price of related goods • 3. Population • 4. Tastes and Preferences • 5. Special Influences

  6. Note that: • Models are simplified theories that show the key relationships among variables. • Often, these relationships are expressed in functions. • - a mathematical concept that shows how • one variable depends on a set of other variables.

  7. Demand Equation: Movement Along the Demand Curve • Q = 100- 1p

  8. Economists when graphing demand curves, always put price on the vertical axis and quantity on the horizontal axis.

  9. Alfred Marshall, conceived of the demand function with a market price as a function of quantity available for sale. • He observed English country markets with numerous sellers bringing their quantities to the marketplace. The demand function specified what price consumers, taken together, would pay for a given quantity.

  10. Today, we assume that consumers take market prices as given and choose quantities that maximize their utilities. • However, Marshall’s influence is so strong that we continue to draw our graphs with price on the vertical axis. Marshall did this because to him, the dependent variable was price and the independent variable was quantity.

  11. However • The modern theory generally conceives of the demand function with the quantity as the dependent variable and price as independent variable.

  12. Shift in the Demand Curve • Q= 8-P+2Y • Suppose: Y=1 • Y=2

  13. Movement along the demand Curve Shift in the Demand Curve • Q = f(P) • Illustrate the law of Demand • Pb, Y, Pop,TP, and SI are held constant • Q= f( Pb, Y, PoP, TP, SI) • Pb, Y, PoP, TP, and SI can change

  14. Supply Quantity of a good and service that producers are willing to sell in a given price.

  15. Law of Supply • When price increases, quantity supplied increases. when price decreases, quantity supplied decreases

  16. Factors Affecting the Supply Curve • 1. Technology • -Computerized manufacturing lowers costs and increases supply • 2. Input Prices • -A reduction in the wage paid to autoworkers lowers production costs • 3. Price of Related goods- If truck prices fall, the supply of cars rises.

  17. 4. Government Policy • -Removing quotas and tariffs on imported automobiles increases total automobile supply. • 5. Special Influences • -Internet shopping and auctions allow consumers t0 compare the prices of different dealers more easily and drives high-cost sellers out of business.

  18. Movement in the Supply curve • Qs= 50+3P

  19. Shift in the supply curve • Qs= 5+P+2TC, TC=2

  20. Market Equilibrium • Equilibrium condition: Qd= Qs, is known as the equilibrium condition equation. The result is equilibrium price (Pe) and equilibrium qunatity (Qe). • Algebraic computation • Given: Qd= 10-P Qs = 5+ P Req. • Equilibrium Price (Pe) • Equilibrium Quantity (Qe)

  21. Solution: Qd = 10-P • Qs = 5+P • 10-P = 5+P • -P+P= 5-10 • 2p= -5 • Pe = 2.5

  22. 10- (2.5) = 5 + (2.5) Therefore, Qd = Qs = 7.5

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