Chapter 3

Chapter 3 - Chapter Three Supply and Demand: Theory...

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Chapter Three – Supply and Demand: Theory Theories = answer questions that do not have obvious answers Market = any place people come together to trade - Two sides: o A buying side = the demand side o A selling side = the supply side Demand refers to: - 1 - The willingness and ability of buyers to purchase different quantities of a good - 2 - At different prices - 3 - During a specific period (per day, week, etc) - Only exists if there is both a willingness and ability to buy Law of Demand = as the price of a good rises, the quantity demanded of the good falls, and as the pride of a good falls, the quantity demanded of the good rises - Price and quantity are inversely related o People substitute lower price good for higher priced good o Law of diminishing marginal utility = for a given time period, the marginal utility or satisfaction gained by consuming equal successive units of a good will decline as the amount consumed increases - Quantity demanded = the number of units of a good that individuals are willing and able to buy at a particular price during some time period Ceteris paribus = latin term meaning “all other things held constant; nothing else changes” Four ways to represent the law of demand: - In words

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- In symbols o P Q d P Q d ceteris paribus - In a demand schedule = the numerical representation of the law of demand (chart) - As a demand curve = graph o (downward sloping) demand curve = graphical representation of the inverse relationship between price and quantity demanded specified by the law of demand Absolute price = the price of the good in money terms Relative price = price of the good in terms of another good Individual demand curve vs. market demand curve -
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This note was uploaded on 04/16/2008 for the course EB 011 taught by Professor Noell during the Spring '08 term at Westmont.

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Chapter 3 - Chapter Three Supply and Demand: Theory...

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