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Fall2012

Economics115
Lecture2:IntrotoSupplyand Demand

OutlineforToday
CourseDetails Review
Scarcity S it OpportunityCost

Demand Supply(maybe) Equilibrium(Wednesday)


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Announcements
SectionPreferenceopensSaturdayat9:00AM
Gotohttps://students.yale.edu/ocs p preference/select/select?id=4195 ClosesTuesdayat9PM Ifyoufailtosignup,youwillneedtogotoOCSafter 9:00AMonWednesdaytotrytofindanopensection

SectionsMeetNextWeek ProblemSetpostedthisafternoon.Dueaweek fromMonday


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ProblemSetRules:
Discuss,consult,workingroups.Thisishelpful andencouraged Writeupyourownresults.ItisnotOKtocopy someoneelsesanswer DueMondaysatthestartoflecture

MainIdeasfromLastTime
Economicsisallabouttheallocationofscarce resources Scarcitygivesrisetoopportunity opportunitycost cost Opportunitycostforcesustoexplicitly examine i trade d offs ff

RelevantTradeoffsoccur
withinanindividualorhousehold(e.g.studyor talk) ) withinafirm(hiremoreworkers,orbuyabetter machine) inmarkets,connectingfirmsandhouseholds(sell moreproductatalowerprice) betweengovt,householdsandfirms(increasea taxonfuel) w/inandbetweencountries,regions,etc (imposeatariff)
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THEDEMANDCURVE
Howmuchwouldbepurchasedateachdifferent p price?

TheDemandforGasoline
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TheDemandCurveis ADemandSchedulelistinghowmuchis demandedateachdifferentprice Thewillingnesstopayforthemarginal unit marginal=extra,last,next.Itistheunit the on h margin i of fb being i purchased. h d

TheLAW LAWOFDEMAND DEMAND


AsPriceincreases, increases Quantitydemandeddecreases Notreallyalawactuallyanobservationanda prediction

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Whydoesdemandslopedown? Finiteincome/wealthimplyOpportunityCosts Incomeeffect:cantaffordallp previousconsumption p Substitutioneffect:othergoodsarerelativelymore attractive


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Dcanbeagraph,oraTable:

DasanE Equation: ti

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Dmightbealine:

Acurve:

Oranabstractfunction:

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GlobalWarmingandtheDemandforGasoline

Toreduceconsumption,increaseprice?

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WhatswiththisLawofDemand,anyway?

Lookat1999 2005.

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TheDcurveholdsallelseequal (otherthanprice)

t i paribus ceteris ib

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Ashift shiftofthedemandcurve curve (achange changein demand)occurswhenafactorotherthan pricechanges changes.Example:populationincrease shiftsthedemandcurveout. Amovement movementalongthedemandcurve: curve :price changes,holdingeverythingelseconstant.

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Achange h i inth thed demand dcurve:

What h might h causethis? h ?


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Population Income
normal lgood dvs

inferiorgood

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Pricesofothergoods g
Substitutes

Complements l

Expectationsoffutureprices. Changeintastes
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AchangeinPisNOTachange changeindemand demand but achangeinquantitydemanded

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AnincreaseinthePriceofGasoline

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DforGasandanIncreaseinIncomesinChina

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Anoldquestion(diamondsvs.water): DoesthePriceofaGoodReflect Benefit(utililty) or Cost? DemandcurvereflectsBenefit(willingnesstopay)

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DemandcurvealonecanNOTdeterminebothP andQ.Itisacurve,notapoint:

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SUPPLY
Firmswanttoearnaprofit OutputofthefirmhasanOpportunityCost thecostofinputs MarginalWillingnesstoSupply Perfectlycompetitivefirmtakespriceasgiven Howmuchtop produce/sell / atafixedandgiven g price?

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TheSupplyCurve

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WhydoesSupplyslopeup?

Increasing i Marginal i lOpportunity O i Cost C butwhataboutEconomiesofScale? Dealwiththislater

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TheSupplyofMaize:diminishingmarginal returns,increasingmarginalopportunitycost

ThinkabouthowhecanincreaseS:more labor,morefertilizer,moreland....
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Whensomeinputisfixed(e (e.g., g land)andthe firmaddsmoreandmoreotherinputs(e.g., labor fertilizer) labor, fertilizer),diminishingreturns eventuallysetsin Fornow now,well we llassumediminishingreturns always,sosupplyslopesup
Later, L t economies i of fscale? l ?

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SasaGraph:

S asaTable:

S asanEquation:

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Smightbealine:

Acurve:

Oranabstractfunction:

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TheScurveholdsallelseequal (otherthanprice)

t i paribus ceteris ib

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Ashift shiftofthesupplycurve curve(achange changein supply)occurswhenafactorotherthanprice changes. changes Examples: Prices P i of fi inputs Technology Numberoffirms Amovement movementalongthesupplycurve: curve :price changes,holdingeverythingelseconstant.
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TodeterminebothP&Q Q,needBOTHS&D equilibrium ilib i noforceisworkingtochangePandQ

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EquilibriumP&Q

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