DEMAND – SUPPLY
The Law of Demand Holding all relevant factors constant – quantity demanded is an inverse function of price. NOTE Terminology This THE MOST powerful propostiton in economics
Demand (own) Price Ceteris Paribus Conditions
Ceteris paribus Conditions Tastes (can’t explain where they come from) Let others do this. For economists tastes are unexplained Income – normal goods/inferior goods Prices of Other Goods – substitutes and compliments – the movement explains the relationship. Expectations – but this can be a trap – be careful – like tastes can be used to explain anything Size of the market – numbers
Terminology Terminology is critical Changes in Quantity Demanded Changes in Demand
Intuitive Forecasting Do this for your business It will make you richer
Supply – no law of supply (own) Price Ceteris Paribus Conditions
Price of Factors – this creates rising marginal costs – more later The level of Technology Natural Disruptions Number of Firms in market Expectations
Terminology Again – but consistant terminology Changes in quantity supplied Changesin supply
Changes in Supply Intuitive Forecasting Do this for your business
MARKETS Put Supply & Demand Together –Changes in Supply –Changes in Demand –Think institutive forecasting for your business
A Theory of Price Formation Return to Equilibrium Changes Movements
Government Intervention Price floors Price ceilings
Issues –Why a bountiful harvest is not good for farmers!!! –Energy crises in California –Free College –Rent Control
TERMINOLOGY Changes in quantity demanded Caused by changes in own price represented by a movement along a given demand curve Changes on Demand Caused by changes in ceteris paribus conditions – represented by a shift in the entire demand curve
What Happens if both Supply and Demand Change Airline Safety Regulations Raise Cost – decrease supply Safer travel – more demand
Utility – Maximization Proof that demand curve has a negative slope
Consumer Surplus “Extra Satisfaction for some consumers