Econ 4.3

Wednesday, January 27, 1999

Announcements: The first exam will be Monday, February 1. It will be multiple choice. Bring a #2 pencil.

Lecture notes:  

Chapter 4: Demand, Supply and Market Equilibrium

• People use all of the resources that they have available to maximize satisfaction
• Consumers are utility maximizers
• Businesses want to make as much profit as survive (they try to findout what people want)
• In a perfectly competitive economy firms don't gain excess profits
  • Too much profit is a signal to other firms that this is a good area to invest in
  • Copyrights and Patents help protect companies
• Governments provide some goods and services that the market would never supply
  • IE: things people use without paying for (street lights)

Law of Demand

• There is an inverse relationship between price and quantity purchased
• Demand Determinants
  • Price
  • Income
  • Wealth
  • Other Prices
  • Tastes, Preferences
  • Future Expectations

  Weekly Market Demand: Pizza
  

• Inferior Good
  • As income rises, you buy less of it
  • As income falls, you buy more of it
• Normal Goods
  • As income rises, ceteris paribus, we buy more normal goods (entertainment)
  • As income falls, ceteris paribus, we buy less normal goods

Law of Supply

• There is a positive relationship between price and quantity offered for sale
• As you expand your output, it is going to be more expensive

• Supply Determinants
  • Price
  • Cost of Production
    • Resources
    • Technologies
  • Prices of Related Products

  Weekly Market Supply: Pizza
  

Equilibrium

• Place where sellers have no feeling that they are competing
• When quantity of what people want to buy equals what firms want to produce

Weekly Market Equilibrium: Pizza

Equilibrium: Price = $7.50 / Quantity = 3000

Market Equilibrium: the price at which the market clears

Market Disquilibrium: Price must rise to restore equilibrium