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ECON1: Lecture 4 (10/4/16)

by: Viola You

ECON1: Lecture 4 (10/4/16) ECON 1

Viola You

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Chapter 4
Principles of Economics
R. Rojas
Class Notes
Economics, Microeconomics
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This 11 page Class Notes was uploaded by Viola You on Wednesday October 5, 2016. The Class Notes belongs to ECON 1 at University of California - Los Angeles taught by R. Rojas in Fall 2016. Since its upload, it has received 4 views. For similar materials see Principles of Economics in Economics at University of California - Los Angeles.

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Date Created: 10/05/16
CHAPTER 4 ­ Supply and Demand ● What drives people to consume certain goods, and what factors affect sellers’  supply of goods? ● How is it that the markets allocate for these resources? ● How is it that we come to some agreement with a quantity that everyone is  happy? Markets and Competition Supply and demand are forces that make market economies work. They determine the  quantity of each good produced and the price at which it is sold ● Price = y­axis, Quantity = x­axis ● Ex: if there’s only one of something left, a consumer might offer to buy for higher  price Define market (review) ­ a group of buyers and sellers of a particular good or service ● Buyers determine the demand for the product ● Sellers determine the supply of the product Define competitive market ­ a market with many buyers and sellers, where each has a negligible effect on the market price In a perfectly competitive market: ● All goods are exactly the same ● Buyers and sellers are so numerous that no one can affect market price ­ each is a “price taker” *NOTE* ­ in these chapters, we assume markets are perfectly competitive ● *not all goods and services are sold perfectly competitive markets (ex: local cable company) Demand Demand represents the behavior of buyers Define quantity demanded ­ amount of a good that buyers are willing and able to purchase ● Many things determine the quantity demanded of any good ­ we will focus on  price ● Ex: if the price of ice­cream rose to $20/schoop, you would most likely buy less  ice­cream Define law of demand ­ the claim that the quantity demanded of a good falls when the price of  the good rises, other things equal What drives your preference for certain goods? ● Prices ● Quality ● Convenience Define demand schedule ­ a table that shows the relationship between the price of a good and  the quantity demanded Ex: Helen’s demand for lattes ● Her preferences obey the law of demand ● At $0.00 = demanded 16 lattes ● At $6.00 = demanded 4 lattes Define demand curve ­ graph of the relationship between the price of a good and the quantity  demanded Demand curves can be read in two ways ● Horizontally: How much (quantity) buyers are willing and able to purchase at a  certain price ● Vertically: The highest price buyers are willing to pay for a certain quantity Define consumer surplus ­ the consumers’ gain from exchange ● The difference between the highest price a consumer will pay at a given quantity  and the actual market price ● Ex: Price of concert ticket is $50, but sold out ○ How much above the price would I be willing to pay?  ○ Going off of student budget, everyone’s idea of what they are  willing to pay will be different Define total consumer surplus ­ the sum of consumer surplus of all buyers ● Everyone’s price they’re willing to pay  Ex: Ice cream market price is $1/scoop. If Ann is willing to pay $2.50/scoop, she enjoys a $1.50  consumer surplus from a scoop of ice cream Important Demand Shifters 1. Income 2. Price of Substitutes a. Ex: Two goods that are so close that there is really no difference  in which to buy if you enjoy both (Coke vs Pepsi) ­ if one raises price, the  demand for the lower price will increase 3. Price of Complements a. Goods that typically will go well together ­ Ex: laptops and  software 4. Expectations a. Ex: Shortage or sale will change the way people buy things 5. Population a. More people, higher demand 6. Tastes ● The demand curve shows how price affects quantity demanded, other things  being equal. ● These “other things” are non­price determinants of demand (i.e., things that  determine buyers’ demand for a good, other than the good’s price). 1. Income ● What would happen to your demand for ice cream if you lost your job one  summer? ○ Your demand for ice cream falls Define normal good ­ a good for which other things equal, an increase in income leads to an  increase in demand (ex: cars, electronics) Define inferior good ­ a good for which other things equal, an increase in income leads to a  decrease in demand (ex: bus rides, Ramen noodles) 2. Price of Substitutes Ex: If Pizza becomes more expensive, but the price of hamburgers does not change, what  would happen to the quantity of hamburgers demanded? ● The quantity demand would increase. Define Substitutes ­ Two goods for which an increase in the price of one, leads to an increase in the demand for the other (e.g., Coke and Pepsi, laptops and desktops, CDs and music  downloads…) 3. Price of Complements Ex: Suppose the price of hot fudge falls. ● According to the Law of Demand you will buy more fudge, but also ice­cream  because hot fudge and ice­cream are used together. Define Complements ­ Two goods for which an increase in the price of one, leads to a decrease in the demand for the other (e.g., computers and software desktops, gasoline and automobiles). Example (Case Study): How to Reduce Smoking? Policy makers can: ● Shift the demand curve for cigarettes and other tobacco products (ex: health  warnings, PSA, prohibit advertising on TV, etc.) ● Raise the price of cigarettes → move up along the demand curve RESULT: (1) 10% increase in price, 4% reduction in the quantity demanded (2) 10% increase in price, 12% reduction in the quantity demanded for teenagers Q: What is the effect this has on the demand for illicit drugs? Opponents of cigarette taxes argue that e.g., tobacco and marijuana are substitutes. ● high cigarette prices encourage marijuana use. Experts on substance abuse view tobacco as a gateway drug  leading to experimentation with  other drugs. Finding: Lower cigarette prices (higher demand for cigarettes) are associated with a greater use of marijuana. ● Tobacco and Marijuana are complements rather than substitutes.  4. Expectations Your expectations about the future may affect your demand for a good or service today ● Graduation, expected to have a job after undergrad ● iPhone 8 ­ will wait to get new phone if I have iPhone 6 right now 5. Number of buyers ● More people more demand ● As the population of an economy changes, the number of buyers of a particular  good also changes, thereby changing its demand 6. Tastes Anything that causes a shift in tastes toward a good will increase demand for that good and shift its Demand (D) curve to the right Example: Atkins diet was popular in 90s, caused increase in demand for eggs, shifted the egg  demand curve to the right Supply Supply represents the behavior of sellers Define quantity supplied ­ amount of a good that sellers are willing and able to sell ● Many things determine the quantity supplied of any good ­ we will focus on price  How is it that sellers respond to changes in prices? ● If price is higher, this is good for sellers because supply will be higher ● Example: ice cream scoops price is low, business is less profitable than when price is higher → low supply when the price is low and high supply when the price is  high ○ High cost producers would be out of business if they had to lower  price to get more people to buy Define law of supply ­ The claim that the quantity supplied of a good rises when the price of the  good rises, other things equal Define supply schedule ­ a table that shows the relationship between the price of a good and  the quantity supplied ● Ex: Starbucks ­ as price went up, quantity of lattes supplies went up Define supply curve ­ a graph of the relationship between the price fo a good and the quantity  supplied Supply curves can be read in two ways: ● Horizontally: How much suppliers are willing and able to sell at a certain price ● Vertically: the MINIMUM (unlike consumers) price for which suppliers are willing  to sell a certain quantity ○ Why lower price when fair market price is ___? Define producer surplus ­ the producers’ gain from exchange ● The diff between the market price and the minimum price at which a producer  would be willing to sell a particular quantity Define total producer surplus ­ the area above the supply curve and below the price ● Objective is to maximize this ● If consumers/sellers were happy with a price that it’s fixed, we want to optimize  the total Example: If ice cream market price is $1/scoop, Ann can produce it at 25 cents, she earns a 75  cent surplus per scoop of ice cream *Will to sell same quantity at lower price can be because of lower input cost Q: Why is the supply curve upward sloping? A: The cost of producing a good is not equal across all suppliers. ● At a low price, a good is produced and sold only by the lowest cost suppliers. ○ Expected to see exit of market of sellers At a high price, a good is also produced and sold by higher cost suppliers. ● Expected to see entry of market of sellers


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