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ECON 1

ECON 1. Week 06.2A March 19, 2011. Review. Markets are the interaction of buyers and sellers. Focus on buyers and sellers separately. Ceteris paribus : look at one thing at a time; All other things held equal. Demand for X. $ P x. $ 10 $ 9 $ 8 $ 7 $ 6 $ 5 $ 4 $ 3 $ 2 $ 1.

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ECON 1

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  1. ECON 1 Week 06.2A March 19, 2011

  2. Review • Markets are the interaction of buyers and sellers. • Focus on buyers and sellers separately. • Ceteris paribus: look at one thing at a time; All other things held equal.

  3. Demand for X $ P x $ 10 $ 9 $ 8 $ 7 $ 6 $ 5 $ 4 $ 3 $ 2 $ 1 Dx Demand shows the amounts purchased at alternative prices(horizontal distances at each price) Demand x Dx Qtyx /T 1 2 3 4 5 6 7 8 9 10

  4. Supply Curve $Price $10 8 6 4 2 2 4 6 8 10 12 14 16 Qty x/ T

  5. $Price $ 4 3 2.50 2.00 1.50 1.00 .50 .25 Demand Surplus at this $ Price Supply 100 200 300 400 500 600 700 800 900 1000 1100 Q x/ T

  6. $Price $ 4 3 2.50 2.00 1.50 1.00 .50 .25 Demand Supply Shortage at this $ Price 100 200 300 400 500 600 700 800 900 1000 1100 Q x/ T

  7. Market Equilibrium $Price 4 3 2.50 2.00 1.50 Pe 1.00 .50 .25 Demand Supply Qty D = Qty S 100 200 300 400 500 600 700 800 900 1000 1100 Q x/ T Qe

  8. Total Revenue = P X Q $ P x Demand $ 10 $ 9 $ 8 $ 7 $ 6 $ 5 $ 4 $ 3 $ 2 $ 1 Supply Pe $6x5 = $30 Dx Qtyx /T 1 2 3 4 5 6 7 8 9 10 11 12 Qe

  9. Transaction Costs of Exchange • Information Costs • Search Costs • Quality Identification Cost • Negotiating Costs: Cost of agreeing on what and how much will be exchanged • Transportation Costs: Cost of moving goods between parties

  10. Increase in Demand $ P x Dx’ Do $ 10 $ 9 $ 8 $ 7 $ 6 $ 5 $ 4 $ 3 $ 2 $ 1 Sx E’ Increases price & quantity E0 Sx Dx’ Do Qtyx /T 1 2 3 4 5 6 7 8 9 10 11 12

  11. Slope Shows Responsiveness of Quantity to a Change in Price B A Px Px P0 P0 Dx P1 P1 Dx Q0Q1 Qx/T Q0 Qx/T Q1

  12. Elasticity: a Measure of responsiveness of Quantity to a Change in Price • Ed = % Δ Qd/ % Δ price • Es = %  Qs / %  price

  13. Elasticity & Total Revenue Elastic Inelastic $Px $Px Qty / T Qty/T

  14. Measures of Elasticity • Demand is Elastic : %Δ Qd > %Δ P; ie |Ed| >1. A decrease in Price  an increase in Total Revenue. • Demand is Unitary Elastic: %ΔQd = %ΔP; ie |Ed| = 1. A Change in price  no change in Total Revenue. • Demand is Inelastic: %ΔQd < %ΔP; i.e. |Ed| < 1. An increase in Price  an increase in Total Revenue.

  15. Determinants of Price Elasticity of Demand • Number & Closeness of Substitutes. • Information about price change and availability of substitutes. • Percentage of Income Spent on good. • Period of time: Second Law of Demand: Demand is more elastic over a longer period of time.

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