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Econ 2, Week 1

by: Katherine Notetaker

Econ 2, Week 1 Econ 2

Katherine Notetaker
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About this Document

These notes cover the first week of Econ 2. It is a general review of supply and demand.
Introduction to Macroeconomics
Ajay Shenoy
Class Notes
#economics #Econ2 #macroeconomics




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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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