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Understanding Individual Markets:
Supply & Demand CHAPTER THREE
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MARKETS DEFINED
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MARKETS DEFINED POTENTIAL BUYERS
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MARKETS DEFINED POTENTIAL BUYERS POTENTIAL SELLERS
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MARKETS DEFINED MARKETS
POTENTIAL BUYERS POTENTIAL SELLERS MARKETS
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DEMAND DEFINED
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DEMAND DEFINED DEMAND SCHEDULE P QD $1 2 3 4 5 80 55 35 20 10
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DEMAND DEFINED DEMAND SCHEDULE Various Amounts P QD $1 2 3 4 5 80 55
35 20 10 Various Amounts
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DEMAND DEFINED DEMAND SCHEDULE Various Amounts
P QD $1 2 3 4 5 80 55 35 20 10 Various Amounts A Series of Possible Prices …a specified time period …other things being equal
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LAW OF DEMAND
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LAW OF DEMAND As Price Falls…
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LAW OF DEMAND As Price Falls… …Quantity Demanded Rises
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LAW OF DEMAND As Price Falls… …Quantity Demanded Rises As Price Rises…
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LAW OF DEMAND As Price Falls… …Quantity Demanded Rises As Price Rises…
…Quantity Demanded Falls
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LAW OF DEMAND As Price Falls… …Quantity Demanded Rises As Price Rises…
…Quantity Demanded Falls An inverse relationship exists between price and quantity demanded
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LAW OF DEMAND
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LAW OF DEMAND Diminishing Marginal Utility
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LAW OF DEMAND Diminishing Marginal Utility Income Effect
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LAW OF DEMAND Diminishing Marginal Utility Income Effect
Substitution Effect
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LAW OF DEMAND Diminishing Marginal Utility Income Effect
Substitution Effect Demand Curve
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LAW OF DEMAND Diminishing Marginal Utility Income Effect
Substitution Effect Demand Curve Individual and Market Demand
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DETERMINANTS OF DEMAND
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DETERMINANTS OF DEMAND
Tastes and Preferences
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DETERMINANTS OF DEMAND
Tastes and Preferences Number of Customers
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DETERMINANTS OF DEMAND
Tastes and Preferences Number of Customers Money Incomes Normal (Superior) & Inferior Goods
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DETERMINANTS OF DEMAND
Tastes and Preferences Number of Customers Money Incomes Normal (Superior) & Inferior Goods Prices of Related Goods Substitutes & Complements
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DETERMINANTS OF DEMAND
Tastes and Preferences Number of Customers Money Incomes Normal (Superior) & Inferior Goods Prices of Related Goods Substitutes & Complements Consumer Expectations
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Graphing Demand Plot the Points P QD $1 2 3 4 5 80 55 35 20 10 P o Q
Price of Corn P Q o $5 4 3 2 1 CORN Plot the Points P QD $1 2 3 4 5 80 55 35 20 10 Quantity of Corn
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Graphing Demand Plot the Points P QD $1 2 3 4 5 80 55 35 20 10 P o Q
Price of Corn P Q o $5 4 3 2 1 CORN Plot the Points P QD $1 2 3 4 5 80 55 35 20 10 P1 55 Quantity of Corn
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Graphing Demand Plot the Points Etc. P QD $1 2 3 4 5 80 55 35 20 10 P
Price of Corn P Q o $5 4 3 2 1 CORN Plot the Points Etc. P QD $1 2 3 4 5 80 55 35 20 10 35 Quantity of Corn
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Graphing Demand P QD $1 2 3 4 5 80 55 35 20 10 P D o Q Price of Corn
$5 4 3 2 1 CORN D P QD $1 2 3 4 5 80 55 35 20 10 Quantity of Corn
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SUPPLY DEFINED SUPPLY SCHEDULE P QD $1 2 3 4 5 20 35 50 60 P QS $1 2 3
CORN CORN P QD $1 2 3 4 5 20 35 50 60 P QS $1 2 3 4 5 80 55 35 20 10
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SUPPLY DEFINED SUPPLY SCHEDULE Various Amounts P QD $1 2 3 4 5 20 35
CORN CORN P QD $1 2 3 4 5 20 35 50 60 P QS $1 2 3 4 5 80 55 35 20 10 Various Amounts
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SUPPLY DEFINED SUPPLY SCHEDULE Various Amounts
CORN CORN P QD $1 2 3 4 5 20 35 50 60 P QS $1 2 3 4 5 80 55 35 20 10 Various Amounts A Series of Possible Prices …a specified time period …other things being equal
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LAW OF SUPPLY
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LAW OF SUPPLY As Price Rises…
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LAW OF SUPPLY As Price Rises… …Quantity Supplied Rises
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LAW OF SUPPLY As Price Rises… …Quantity Supplied Rises As Price Falls…
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LAW OF SUPPLY As Price Rises… …Quantity Supplied Rises As Price Falls…
…Quantity Supplied Falls
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LAW OF SUPPLY As Price Rises… …Quantity Supplied Rises As Price Falls…
…Quantity Supplied Falls A direct relationship exists between price and quantity supplied
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DETERMINANTS OF SUPPLY
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DETERMINANTS OF SUPPLY
Resource Prices
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DETERMINANTS OF SUPPLY
Resource Prices Technique of Production
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DETERMINANTS OF SUPPLY
Resource Prices Technique of Production Taxes & Subsidies
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DETERMINANTS OF SUPPLY
Resource Prices Technique of Production Taxes & Subsidies Prices of Other Goods
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DETERMINANTS OF SUPPLY
Resource Prices Technique of Production Taxes & Subsidies Prices of Other Goods Price Expectations
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DETERMINANTS OF SUPPLY
Resource Prices Technique of Production Taxes & Subsidies Prices of Other Goods Price Expectations Number of Sellers
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Graphing Supply Plot the Points P QD P QS $1 2 3 4 5 80 55 35 20 10 $1
Price of Corn P Q o Plot the Points $5 4 3 2 1 CORN CORN P QD P QS $1 2 3 4 5 80 55 35 20 10 $1 2 3 4 5 5 20 35 50 60 5 Quantity of Corn
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Graphing Supply Plot the Points P QD P QS $1 2 3 4 5 80 55 35 20 10 $1
Price of Corn P Q o Plot the Points $5 4 3 2 1 CORN CORN P QD P QS $1 2 3 4 5 80 55 35 20 10 $1 2 3 4 5 5 20 35 50 60 Quantity of Corn
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Graphing Supply Plot the Points Etc. P QD P QS $1 2 3 4 5 80 55 35 20
Price of Corn P Q o Plot the Points Etc. $5 4 3 2 1 CORN CORN P QD P QS $1 2 3 4 5 80 55 35 20 10 $1 2 3 4 5 5 20 35 50 60 35 Quantity of Corn
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Graphing Supply P QD P QS $1 2 3 4 5 80 55 35 20 10 $1 2 3 4 5 5 20 35
Price of Corn P Q o S $5 4 3 2 1 CORN CORN P QD P QS $1 2 3 4 5 80 55 35 20 10 $1 2 3 4 5 5 20 35 50 60 Quantity of Corn
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Graphing Supply Combining with Demand P QD P QS $1 2 3 4 5 80 55 35 20
Price of Corn P Q o S $5 4 3 2 1 CORN CORN P QD P QS Combining with Demand $1 2 3 4 5 80 55 35 20 10 $1 2 3 4 5 5 20 35 50 60 Quantity of Corn
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Demand & Supply P QD P QS $1 2 3 4 5 80 55 35 20 10 $1 2 3 4 5 5 20 35
Price of Corn P Q o S $5 4 3 2 1 CORN D CORN P QD P QS $1 2 3 4 5 80 55 35 20 10 Market Clearing Equilibrium $1 2 3 4 5 5 20 35 50 60 35 P1 Q1 Quantity of Corn
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No! Would these two AP Econ students rate Pizza the same? Would these two AP Econ students rate soap the same? Would these two AP Econ students rate panty hose the same? panty hose a 5 shaun?
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Consumer Surplus If an ice cream cone costs $1.50, but Shaun would pay $2.00 for the ice cream cone than Shaun’s consumer surplus is $0.50. If a Hockey Stick costs 24.50, and Jon or Adam would pay $30.00 for a Hockey Stick than their consumer surplus is $5.50 each or $11 in total. They would feel good about their lucky purchases! All three boys have received some UTILITY!
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Total Consumer Surplus
Price $40 At a price of $30! $30 Total Cosumer Surplus $20 $10 Quantity
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Consumer Surplus in Total Producer Surplus in Total
Q Q
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Dead Weight Loss P S P2 Price Floor P1 D Q Q2 Q1
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Correcting for Spillover Costs Over allocation – too much bad stuff
s + Tax Spillover costs True Market Price! S New market price paid by consumers Dead Weight Loss From 2003 Essay! Price too Low! Amount of Tax needed to correct Negative externality! D Q Qd = Qs Over allocation – too much bad stuff Copyright Schill 2003!
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Demand & Supply What if Demand Increases? P S D o Q Price of Corn $5 4
3 2 1 D Quantity of Corn
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Demand & Supply P S D’ D o Q Increase in Quantity Supplied Increase in
Price of Corn P Q o D’ S $5 4 3 2 1 D Increase in Quantity Supplied Increase in Demand Quantity of Corn
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Demand & Supply What if Demand Decreases? P S D’ D o Q Price of Corn
$5 4 3 2 1 D Quantity of Corn
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Demand & Supply P S D D’ o Q Decrease in Quantity Supplied Decrease in
Price of Corn Decrease in Quantity Supplied P Q o S $5 4 3 2 1 D D’ Decrease in Demand Quantity of Corn
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Demand & Supply What if Supply Increases? P S D o Q Price of Corn $5 4
3 2 1 D Quantity of Corn
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Demand & Supply P S S’ D o Q Increase in Supply Increase in Quantity
Price of Corn P Q o Increase in Supply S $5 4 3 2 1 D S’ Increase in Quantity Demanded Quantity of Corn
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Demand & Supply What if Supply Decreases? P S S’ D o Q Price of Corn
$5 4 3 2 1 D S’ Quantity of Corn
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Demand & Supply S’ P S D o Q Decrease in Supply Decrease in Quantity
Price of Corn S’ P Q o S $5 4 3 2 1 D Decrease in Quantity Demanded Quantity of Corn
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This Week in Econ! Prepare for unit test!!!
Finish work on Chapters 1- 2 – 3 Practice manipulation of Demand and Supply Learn “Consumer surplus” and “Producer surplus” Learn “Price ceilings” & “Price floors”
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Demand & Supply P QD P QS $1 2 3 4 5 80 55 35 20 10 $1 2 3 4 5 5 20 35
Price of Corn P Q o S $5 4 3 2 1 CORN D CORN P QD P QS $1 2 3 4 5 80 55 35 20 10 Market Clearing Equilibrium $1 2 3 4 5 5 20 35 50 60 35 P1 Q1 Quantity of Corn
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Consumer Surplus in Total Producer Surplus in Total
Q Q
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Demand & Supply Surplus P QD P QS $1 2 3 4 5 80 55 35 20 10 $1 2 3 4 5
Price of Corn P Q o S $5 4 3 2 1 CORN Surplus CORN D P QD P QS At a $5 price more is being supplied than demanded $1 2 3 4 5 80 55 35 20 10 $1 2 3 4 5 5 20 35 50 60 Quantity of Corn
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Demand & Supply Shortage P QD P QS $1 2 3 4 5 80 55 35 20 10 $1 2 3 4
Price of Corn P Q o S $5 4 3 2 1 CORN CORN D P QD P QS At a $1 price more is being demanded than supplied $1 2 3 4 5 80 55 35 20 10 $1 2 3 4 5 5 20 35 50 60 Shortage Quantity of Corn
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Market Equilibrium
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Market Equilibrium Equilibrium Price & Quantity
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Market Equilibrium Equilibrium Price & Quantity
Rationing Function of Prices
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Market Equilibrium Equilibrium Price & Quantity
Rationing Function of Prices Changes in Demand
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Market Equilibrium Equilibrium Price & Quantity
Rationing Function of Prices Changes in Demand Changes in Quantity Demanded
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Market Equilibrium Equilibrium Price & Quantity
Rationing Function of Prices Changes in Demand Changes in Quantity Demanded Changes in Supply
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Market Equilibrium Equilibrium Price & Quantity
Rationing Function of Prices Changes in Demand Changes in Quantity Demanded Changes in Supply Changes in Quantity Supplied
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Applications... Price Ceiling P D S The result of imposing a
legal price ceiling is a... P S D Q Copyright McGraw-Hill, Inc., 1999
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Applications... Price Ceiling P D S P Legal Price Ceiling Pc SHORTAGE
Q Copyright McGraw-Hill, Inc., 1999
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Applications... With shortages comes... Rationing Problems and
Price Ceiling With shortages comes... Rationing Problems and Black Markets P D S P Legal Price Ceiling Pc SHORTAGE S D Q Copyright McGraw-Hill, Inc., 1999
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Price Ceiling Rent Controls Applications...
Copyright McGraw-Hill, Inc., 1999
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Credit Card Interest Ceilings
Applications... Price Ceiling Rent Controls Credit Card Interest Ceilings Copyright McGraw-Hill, Inc., 1999
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Credit Card Interest Ceilings
Applications... Price Ceiling Rent Controls Credit Card Interest Ceilings Rock Concerts Copyright McGraw-Hill, Inc., 1999
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Applications... P The result of D imposing a S legal price
floor is a... D S P S D Q Q Copyright McGraw-Hill, Inc., 1999
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Applications... SURPLUS P The result of imposing a legal price
floor is a... D S SURPLUS Pf Legal Price Floor P S D Q Qd Q Qs Copyright McGraw-Hill, Inc., 1999
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Complex Cases Multiple Shifts
Market Equilibrium Equilibrium Price & Quantity Rationing Function of Prices Changes in Demand Changes in Quantity Demanded Changes in Supply Changes in Quantity Supplied Complex Cases Multiple Shifts
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Chapter Conclusion Market Equilibrium Equilibrium Price & Quantity
Rationing Function of Prices Changes in Demand Changes in Quantity Demanded Changes in Supply Changes in Quantity Supplied Chapter Conclusion
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Key Terms market demand demand schedule demand curve law of demand
diminishing marginal utility income effects substitution effects determinants of demand normal good inferior good substitute good complementary good change in demand vs. quantity demanded change in supply vs. quantity supplied supply supply schedule determinants of supply surplus shortage equilibrium price and quantity rationing function of prices
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Next: and the Chapter 4
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