Econ 162

Determinants of Demand Price of good X (PX ) Price of substitutes (PY) Income (I) Tastes and Expectations (T) Population of Consumers (Pop)

10/3/2012 6:48:00 AM

Demand Equation QDF = F(PX , PY , I, T, Pop) Function Quantity demanded of some good X

Change in quantity demanded Results from a change in X only Movement along a given demand curve Results from a change in Y, I, T, Pop Shift of entire demand curve

Change in Demand

An increase in demand may be caused by: An increase in the price of a substitute A decrease in the price of a complement An increase in income if good is normal

10/3/2012 6:48:00 AM 1) Resource allocation Prices and profits act as signals to firms to produce more in those markets where prices and profits are rising and less where price and profits are falling 2) Consumer Sovereignty Markets respond to changes in consumer preferences Self-interest invisible hand government Adam Smith The Wealth of Nations (1776)

10/3/2012 6:48:00 AM Markets and Government Political Economy What is the proper role of government in the economy? Fundamental Economic Questions What and how much to produce? How to produce? For whom to produce? When to consume?

Types of Economic Systems Traditional Economies o Economic decisions are based on what was done in the past Command and control (central planning) o Economic decisions are made by government bureaucrats Market Economy (Capitalism) o Economic decisions are decentralized through the price mechanism

10/3/2012 6:48:00 AM Label axis and be careful of vertical/horizontal Show change graphically show old and new If it is attainable and efficient Curved line = no numbers Straight line = numbers

Drawing a CPC Label axis, draw PPC Determine the starting points Compute the other intercept (based on Terms of Trade) Check if CPC can reach the axis