Lectures

Informal lecture notes.

Demand

Demand \(\neq\) Quantity demanded

Always remember that demand is the full relationship between price and quantity. Demand is a list of prices and quantites. Quantity demanded is a single quantity associated with a given price.

Demand Factors

Demand is a simple model with only two variables price and quantity. Within the model, those two varibles only will change, ceteris paribus.

However, we can change the assumptions or change some factors outside of the demand model. What if the law changes? What would happen to demand for indica when the product passes from illegal to legal?

Factors:

  • Income
  • Prices of Substitutes
  • Prices of Complements
  • Preferences
  • Expectations

Market Demand

Market demand is the sum of individual demands

Veblen

19th century economist who dabbled in sociology, see Veblen (1899). Veblen goods reverse the normal logic of economics. The law of demand states that quantity demanded falls as price rises; with Veblen goods, the higher the price, the higher the demand, for the more expensive they are, the more effectively they proclaim the status of their owners. In June 2016, Christie’s Honk Kong sold a matte Himalayan crocodile skin Birkin (Hermès Bag) with a ten-carat diamond-studded white-gold clasp and lock for $300,168.‘Veblen coined the phrase ’conspicuous consumption’

  • When we talk of a Veblen good, we mean the special case where the demand curve is upward slopping. Veblen goods are special goods for which the demand increases as price increases. (Kijiji in Nanaimo?)

Supply

The whole relationship between prices and quantity from the point of view of the producers. We would expect to see an increase in the quantity supplied as prices are increasing.

Note that increase in supply will shift the supply curve down.

Supply Factors

Factors external to the model variables. That is anything that is not price or quantity.

  • Resources
  • Technology
  • Prices of Substitutes
  • Prices of Complements
  • Expectations

Two Equilibria

Utility

The marginal utility (increased satisfaction from consuming an extra unit) from consuming a single good is usually decreasing. That is as you consume more of something the next unit gives you lower satisfaction. For example, your first sip of water after a long walk induces a high level of satisfaction. Your third glass of water may still bring you satisfaction, but at a lower intensity than the first sip. Will call this diminishing marginal utility. A negative relationship between quantity and marginal utility.

Remember marginal utility \(\neq\) utility except for the first unit consumed.

References

Veblen, Thorstein. 1899. The Theory of the Leisure Class: An Economic Study in the Evolution of Institutions. Macmillan.