1. Economics Demand, Supply, Market 1

2.  Assumptions  Diminishing marginal value  Maximization  Consumer’s equilibrium  Terminology  Demand  Quantity demanded  Ceteris paribus  Stocks vs flows  What if price changes?  The price of a good/service and its quantity demanded are inversely (negatively) related, ceteris paribus = Law of Demand 2

3.  Demand curve  And demand schedule  What about ceteris paribus?  Exogenous variables  Demand curve shift  Change in demand vs change in quantity demanded  Income  Price of a substitute/complement  Expectations  Tastes and population numbers  immigration 3

4.  Assumptions  Increasing marginal cost  Maximization of profit  Firm’s equilibrium  Terminology  Supply  Quantity supplied  Ceteris paribus  What if price changes?  The price of a good/service and its quantity demanded are positively related, ceteris paribus = Supply schedule 4

5.  Supply curve  What about ceteris paribus?  Exogenous variables  Supply curve shift  Change in supply vs change in quantity supplied  Prices of inputs  Technology  Taxes and subsidies  Expectations  Prices of complements/substitutes (in production)  Number of firms 5

6.  Market  Institution that allows exchange  Institution that produces price  Suppose the suppliers and the buyers do meet (even if virtually)  Visible price => decisions about quantities demanded/supplied  Excess supply (surplus) => downward pressure on price  Excess demand (shortage/deficit) => downward pressure on price  Equilibrium price = market-clearing price 6

7.  Comparative statics; recall:  Income  Price of a substitute/complement  Expectations  Tastes and population numbers  Prices of inputs  Technology  Taxes and subsidies  Expectations  Prices of complements/substitutes (in production)  Number of firms 7

8.  Known change in an exogenous variable => prediction about equilibrium (P, Q)  Known change in equilibrium => good guess about curve shifts  Is now a good time to buy a house?  Practice Algebra of Equilibrium (p.68-69) 8