Econ 2, Week 1
Econ 2, Week 1 Econ 2
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This 7 page Class Notes was uploaded by Katherine Notetaker on Thursday March 17, 2016. The Class Notes belongs to Econ 2 at University of California - Santa Cruz taught by Ajay Shenoy in Winter 2016. Since its upload, it has received 20 views. For similar materials see Introduction to Macroeconomics in Economcs at University of California - Santa Cruz.
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Date Created: 03/17/16
Introduction to Macroeconomics: Supply and Demand Review Scenario: Suppose you are the Chair of the Assembly of the African Union. Like the rest of the world, Africa faces a food shortage, The member nations of the African Union need to coordinate a policy response to this crisis. They have asked you to propose a policy. What do you propose? ● If the market price for a surfboard decreases from $80 to $20, Alan and Grace, in addition to Carlos, will all buy a surfboard ○ Whoever buys last is the marginal buyer ■ If he/she buys a surfboard, everyone else, prior to the marginal buyer, will all purchase a surfboard ● The demand curve slopes downwardlower price means more buyers ○ This is also known as the “law of demand” ● Quantity demanded is the quantity people are willing and able to buy at some price ● The demand function shows the quantity demanded for any price ○ Quantity is typically graphed on the horizontal axis, and price is typically graphed on the vertical axis ■ This is also known as the inverse demand curve ● Each point on the inverse demand curve is the “willingnesstopay” among consumers for some quantity ● Consumer surplus is the difference between what each consumer is willing to pay and he/she actually paid ○ This only applies to consumers who actually purchased a good ● The total consumer surplus is the sum of individual consumer’s surplus ● Factors that shift the demand curve include: income, population, price of substitutes, price of complements, expectations, and taste ○ In other words, anything other than the price of a good induces a change in demand ● Factors that shift the supply include: physical cost of production (technology, input price), entry and exit of producers, production taxes, subsidies, expectations, changes in opportunity cost, and changes in the price of complements of production ● The supply curve is a function that shows the quantity of the good producers want to sell at each price ○ Each point on the supply curve represents the quantity supplied at some price ○ Each point on the inverse supply curve represents the cost of the marginal producer ○ Anything other than the price of a good shifts the supply curve ● When the price is too high, there is more supply than demand ● When the price is too low, there is more demand than supply ● The market always moves towards equilibrium ○ When supply equals demand, the market clears ● Any price above the equilibrium price creates excess supply which is also known as surplus ● Any price below the equilibrium price creates excess demand which is known as shortage ● The purple triangle represents the producer’s surplus which is below the equilibrium price but above the supply curve. ○ To calculate the producer’s surplus, use the formula: 0.5[base] x [height] ● The inverse supply curve represents the willingness to do something costly ● The inverse demand curve represents the benefit from doing something costly
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