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ECO 120 - Global Macroeconomics

ECO 120 - Global Macroeconomics. Taggert J. Brooks Spring 2014. Module 05. Supply and demand Introduction. Supply and Demand: A Model of a Competitive Market. A competitive market : Many buyers and sellers Same good or service

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ECO 120 - Global Macroeconomics

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  1. ECO 120 - Global Macroeconomics Taggert J. Brooks Spring 2014

  2. Module 05 Supply and demand Introduction

  3. Supply and Demand: A Model of a Competitive Market • A competitive market: • Many buyers and sellers • Same good or service • The supply and demandmodel is a model of how a competitive market works.

  4. Supply and Demand: A Model of a Competitive Market • Five key elements: • Demand curve • Supply curve • Demand and supply curve shifts • Market equilibrium • Changes in the market equilibrium

  5. Demand Schedule for Coffee Beans Price of coffee beans (per pound) Quantity of coffee beans demanded (billions of pounds) $2.00 7.1 7.5 1.75 8.1 1.50 8.9 1.25 10.0 1.00 11.5 0.75 14.2 0.50 The Demand Schedule and the Demand Curve • A demand schedule shows how much of a good or service consumers will want to buy at different prices.

  6. Demand curve, D The Demand Schedule and the Demand Curve Price of coffee bean (per gallon) A demand curve is the graphical representation of the demand schedule; it shows how much of a good or service consumers want to buy at any given price. $2.00 1.75 1.50 1.25 1.00 As price rises, the quantity demanded falls 0.75 0.50 0 7 9 11 13 15 17 Quantity of coffee beans (billions of pounds)

  7. Shifts of the Demand Curve Demand Schedules for Coffee Beans Quantity of coffee beans demanded (billions of pounds) Price of coffee beans (per pound) • An increase in the population and other factors generate an increase in demand – a rise in the quantity demanded at any given price. in 2002 in 2006 7.1 8.5 $2.00 1.75 7.5 9.0 1.50 8.1 9.7 1.25 8.9 10.7 1.00 10.0 12.0 0.75 11.5 13.8 0.50 14.2 17.0

  8. Shifts of the Demand Curve Demand Schedules for Coffee Beans Quantity of coffee beans demanded (billions of pounds) Price of coffee beans (per pound) • This is represented by the two demand schedules: • One showing demand in 2002, before the rise in population. • The other showing demand in 2006, after the rise in population. in 2002 in 2006 7.1 8.5 $2.00 1.75 7.5 9.0 1.50 8.1 9.7 1.25 8.9 10.7 1.00 10.0 12.0 0.75 11.5 13.8 0.50 14.2 17.0

  9. 2 Shifts of the Demand Curve Price of coffee beans (per gallon) Increase in population  more coffee drinkers $2.00 Demand curve in 2006 1.75 1.50 1.25 1.00 Demand curve in 2002 0.75 0.50 D D 1 0 7 9 11 13 15 17 Quantity of coffee beans (billions of pounds) A shift of the demand curve is a change in the quantity demanded at any given price, represented by the change of the original demand curve to a new position, denoted by a new demand curve.

  10. Movement Along the Demand Curve A movement along the demand curve is a change in the quantity demanded of a good that is the result of a change in that good’s price. Price of coffee beans (per gallon) A shift of the demand curve… $2.00 1.75 … is not the same thing as a movement along the demand curve A C 1.50 1.25 B 1.00 0.75 0.50 D D 1 2 0 7 8.1 9.7 13 15 17 10 Quantity of coffee beans (billions of pounds)

  11. Shifts of the Demand Curve Price • A “decrease in demand”, means a leftward shift of the demand curve: at any given price, consumers demand a smaller quantity than before. (D1D3) Increase in demand • An “increase in demand” means a rightward shift of the demand curve: at any given price, consumers demand a larger quantity than before. (D1D2) Decrease in demand D D D 3 1 2 Quantity

  12. Understanding Shifts of the Demand Curve • Changes in the Prices of Related Goods • Substitutes: Two goods are substitutes if a fall in the price of one of the goods makes consumers less willing to buy the other good. • Complements: Two goods are complements if a fall in the price of one good makes people more willing to buy the other good.

  13. Understanding Shifts of the Demand Curve • Changes in Income • Normal Goods: When a rise in income increases the demand for a good - the normal case - we say that the good is a normalgood. • Inferior Goods:When a rise in income decreases the demand for a good, it is an inferior good.

  14. Understanding Shifts of the Demand Curve • Changes in Tastes • Changes in Expectations

  15. Individual Demand Curve and the Market Demand Curve (c) Market Demand Curve (a) Darla’s Individual Demand Curve (b) Dino’s Individual Demand Curve Price of coffee beans (per pound) Price of coffee beans (per pound) Price of coffee beans (per pound) $2 $2 $2 D Market 1 1 1 D D Darla Dino 0 20 30 0 10 20 0 30 40 50 Quantity of coffee beans (pounds) Quantity of coffee beans (pounds) Quantity of coffee beans (pounds) The market demand curve is the horizontal sum of the individual demand curves of all consumers in that market.

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