The Law of Demand (NEW 2016)

Our study of market economies requires us to examine both the demand-side and the supply-side of product and resources markets. Buyers and sellers interact with one another to engage in mutually beneficial exchanges in a market economy, and prices are set based on the demand and supply for a particular good, service or resource. This video lesson presents the law of demand, and explains how the demand curve can illustrate this fundamental economic concept.

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Why does Supply slope upwards? (The law of increasing opportunity cost and supply)

In a previous lesson we introduced the law of supply and the determinants of supply, but we never clearly explained WHY there is a direct relationship between price and quantity supplied. In this lesson we will connect the law of supply to a law introduced in an earlier lesson on the PPC and the Law of Increasing Opportunity Costs.

The concept of increasing marginal costs of production will be explained and the link between firms’ marginal costs and supply will be established in this lesson.

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Efficiency and equilibrium in competitive markets

This week we will be wrapping up unit 1.1 from the IB Economics syllabus here in Zurich. The final topic to cover from this section of the course is the relationship between equilibrium in a competitive market and allocative efficiency. The video below explains why the most efficient result a market can hope to achieve occurs when the price and quantity are determined by the intersection of supply and demand. Any price and quantity combination other than that found at equilibrium will reduce overall efficiency and lead to a loss of societal welfare.

 

Discussion Questions about Efficiency:

  1. “The invisible hand of the competitive market results in a more efficient allocation of resources than prices set by a government can ever hope to achieve.” Explain the economic reasoning behind this statement.
  2. Why does the marginal benefit to consumers of a good decrease the greater the quantity of the good becomes available on the market? Why does the marginal cost to producers increase?
  3. How do competitive market forces assure resources will be efficiently allocated towards the provision of various goods and services? In other words, if the quantity in a market is not at equilibrium, why is it likely to move towards equilibrium over time?
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Consumer Surplus and Producer Surplus

The additional benefits enjoyed by consumers pay less than they are willing to pay and by producers who sell for a price higher than they are willing to sell for are known as consumer and producer surplus. Together they make up the “total welfare” of a market. This lesson introduces and explains these concepts, important for understanding what makes the market system effective at meeting society’s wants and needs.

 

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Introduction to Dead Weight Loss (Welfare Loss)

Introduction to Dead Weight Loss (Welfare Loss)

As we’ve learned in earlier lessons, markets tend to achieve equilibrium prices and quantities that are efficient, as the marginal benefit of a product to its consumers equals the marginal cost to producers. But what makes outcomes other than equilibrium inefficient? This lesson looks at the impact of disequilibria on consumer and producer surplus, introducing the concept of “deadweight loss” or “welfare loss”, which will further help us understand what makes outcomes other than the equilibrium quantity and price inefficient.

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Introduction to Linear Demand Equations

This is an update to the 2012 version of the lesson introducing how to determine an equation for demand using price and quantity data from a demand schedule or a demand curve. In parts 2 and 3 of this lesson we’ll examine how changes in price and the non-price determinants of demand will lead to movements along a demand curve or a change in the ‘a’ and ‘b’ variables and a shift in demand.

Linear Demand Equations – Part 1

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Linear Demand Equations – Shifts in Demand (changes in the ‘a’ and the ‘b’ variables)

In our 3rd lesson on linear demand equations we’ll learn how a change in a non-price determinant of demand can cause the ‘a’ variable to change and a shift inwards or outwards of the demand curve along the quantity axis.

In our final lesson on linear demand equations we’ll look at how a change in a non-price determinant of demand can cause the demand curve to pivot along the quantity axis, changing the ‘b’ variable, resulting in either an increase or a decrease in the responsiveness of consumers to price changes.

Linear Demand Equations – part 3

Linear Demand Equations – part 4

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Deriving demand and supply equations from a set of data

Suppose all you knew were a couple of points from a demand or supply schedule, and you were asked to determine the equations that described the demand and supply of the product. For example, what if you knew that,

  • At a price of $5, 1,000 movie tickets would be demanded in a small town, but only 200 would be supplied, while,
  • At a price of $15, 300 movie tickets would be demanded and 1,200 would be supplied.
Could you use this information to derive the demand and supply equations for movie tickets? Could you then calculate the equilibrium price and quantity of movie tickets? Watch the video lecture that follows, and then apply what you learned to find the demand and supply equations for movie tickets using the data above. Also determine the equilibrium price and quantity of movie tickets.

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Calculating the area of Deadweight Loss welfare loss in a Linear Demand and Supply model

Once you’ve learned how to calculate the areas of consumer and producer surplus on a graph when the market is in equilibrium, the next question is how so we determine the loss of total welfare when a market is out of equilibrium. This lesson shows how to find the changes in CS and PS when the price is not at the free market equilibrium and thereby determine how much welfare loss arises from a disequilibrium.

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A supply and demand paradox – Why is the Chevy Volt twice the price of the Chevy Cruze?

One of the many things I appreciate about economics is that it helps us better understand things in the world around us that without economic tools would seem like mysteries. For example, a few weeks ago I went for a hike with a friend who works for General Motors here in Switzerland. One perk of his job is that he gets to drive different GM cars around before they go on sale in Europe. He showed up to the hike in a 2012 Chevy Cruze. I commented on what a nice looking car it was and asked him how much it would sell for. He told me it would start aroun 17,000 francs here in Switzerland, and then he told me about Chevy’s new plug-in hybrid, the Chevy Volt, which would start at around 32,000 francs.

 

 

 

 

I decided to ask my IB students today to try and explain the price differences between the Chevy Volt and the Cruze using supply and demand analysis. In the video below, I offer my own economic analysis of the two cars. Watch the video and respond to the discussion questions that follow.

 

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