CV 2014 July 19

Thomas Carlyle: "Teach a parrot the terms supply and demand and you've got an economist" Price Quantity Demand (slopes downward) Supply (slopes upward) Market Equilibrium ceteris paribus other things constant holding other things equal critical to understanding economic analysis example: to draw the demand curve in price and quantity space "shift factors" have to be held constant SHIFT FACTORS - income - population - tastes - prices of related goods - tastes - special influences if one of these factors changes, demand curve shifts inwards or outwards LAW OF DEMAND the lower the price, ceteris paribus, the more units a consumer will demand the higher the price, ceteris paribus, the less the consumer will demand why quantity demanded tend to fall as price rises (1)SUBSTITUTION EFFECT when price of a good rices, substitute other similar goods for it e.g. as the price of beef rises, i eat more chicken (2)INCOME EFFECT when price rices, purchasing power declines MOVEMENT ALONG CURVES vs SHIFT OF CURVES KEYPOINT (both mouthful and mindful) The market demand curve is the horizontal sum of the individual demand curves why want to know this? from a marketing POV, very useful to understand how a single market demand curve comes from the very many different tastes and preferences of individual consumers SUPPLY CURVE depends on firm's ability to produce supply also depends on individual's decisions to supply the factors of production e.g. how wages, rents, interest rates are set in labor, land, and capital markets always label everything in you graph and you'll be way ahead of the game the lower the price, ceteris paribus, the less units firms will produce the higher the price, holding other things constant, the more firms will produce SHIFT FACTORS - technology - input prices - prices of related goods - government policy - special influences