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    WEEK 2 - Demand and Supply and Market Equilibrium

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    WEEK 2 - Demand and Supply and Market Equilibrium

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    WEEK 2- Demand and Supply and Market Equilibrium

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    3 views19 pages

    WEEK 2 - Demand and Supply and Market Equilibrium

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    kvothee100

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    of 19

    DEMAND, SUPPLY

    AND
    MARKET EQUILIBRIUM

    Feride Gönel, YTU Dept of Economics


    The Circular Flow of Economic Activity
    DETERMINANTS OF DEMAND
    PRICE

    INCOME

    ACCUMULATED WEALTH

    PRICES OF OTHER PRODUCTS

    TASTES AND PREFERENCES

    EXPECTATIONS
    Prices (per gallon), USD Quantityt Demanded (gallons per week) The Law of Demand
    8 0
    7 2
    6 3
    5 5
    4 7
    3 10
    2 14
    1 20
    0 26
    Other Determinants of Demand
    § Households with higher income would be expected higher demand
    § Goods for which demand goes up when income is higher and for which demand goes down
    when income is lower are called normal goods. Goods for which demand tends to fall when
    income rises are called inferior goods.
    § When an increase in the price of one good causes demand for another good to increase (a positive
    relationship), we say that the goods are substitutes. On the other hand, when two goods are
    complements, a decrease in the price of one results in an increase in demand for the other and vice
    versa.
    § Within the constraints of prices and incomes, preference shapes the demand curve, but it is
    difficult to generalize about tastes and preferences.
    Shift of Demand Curve – Move along a Demand Curve
    PRICE Quantity Demanded Quantity Demanded
    (per gallon) (gallons/week at an (gallons/week at an income
    $ income of 500 $/week) of 700 $/week)
    8 0 3
    7 2 5
    6 3 7
    5 5 10
    4 7 12
    3 10 15
    2 14 19
    1 20 24
    0 26 30
    Move along
    a Demand Curve

    CHANGE IN CHANGE IN
    PRICE OF QUANTITY
    G&S DEMANDED
    Shift of a Demand Curve

    CHANGE IN
    INCOME, CHANGE IN
    PREFERENCES
    OR PRICES OF DEMAND
    OTHER G&S
    From Household Demand to Market Demand
    THE LAW OF SUPPLY
    PRICE ($) QUANTITY
    SUPPLIED
    1.50 0

    1.75 10,000

    2.25 20,000

    3.00 30,000

    4.00 45,000

    5.00 45,000
    Other Determinants of Supply

    THE COST OF
    PRODUCTION

    THE PRICES OF RELATED


    PRODUCTS
    Shift of Supply Curve – Move Along a Supply Curve
    CHANGE IN
    CHANGE IN QUANTITY
    PRICE OF G&S SUPPLIED

    CHANGE IN COSTS,
    INPUT PRICES, CHANGE IN
    TECHNOLOGY OR
    PRICES OF RELATED SUPPLY
    G&S
    From Firms’ Supply Curves to Market Supply
    MARKET EQUILIBRIUM
    Changes in Equilibrium
    problem with demand and supply functions
    Suppose the market demand for pizza is given by Qd = 300 - 20P and
    the market supply for pizza is given by Qs = 20P - 100, where P = price (per pizza)
    In equilibrium, how many pizzas would be sold and at what price?
    In equilibrium Qd = Qs >>> 300 - 20P = 20P – 100
    >> 400 = 40P >> P = 10
    >> Qd = 300 – 20 (10) = 100
    >> Qs = 20 (10) – 100 = 100

    Case-Fair and Oster, Principles of Economics, prob.11 page 77


    Gains from Trade
    Are Maximized at Equilibrium Price and Quantity
    NON-
    SELLERS

    SELLERS

    QUANTITY OF OIL
    Calculation of Consumer and Producer Surplus
    Consumer surplus
    A consumer is planned to buy a computer and he/she is willing to pay up to $1000. Finally he/she
    finds one for $600 that neets all his/her criteria, saving his/her $400 compared to what he/she
    was willing to pay. The $400 is his/her consumer surplus, which he/she can now save or spend
    on other goods or services.
    Producer Surplus
    A producer who is a manufacturer of niche products and the manufacturing cost of the product
    is around $150 per piece and the producer is willing to sell the product at $180. However, due to
    sudden spike in the demand the product is resulting higher market price of $240. Producer
    surplus is equal to = (market price – minimum price to sell)*quantity sold at equilibrium. So if the
    producer sell 50,000 pieces during the year, the producer surplus = $3,000,000

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