BPUB250 Spring 2008 - Chapter 2 - The Basics of Supply and Demand

BPUB250 Spring 2008 - Chapter 2 - The Basics of Supply and Demand

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Chapter 2 – The Basics of Supply and Demand Section 2.1 – Supply and Demand Supply Curve – The quantity of a good that producers are willing and able to sell at a given price. o The higher the price, the more firms are able and willing to produce and sell. o A higher price may also attract new firms to the market. Newcomers face higher costs due to inexperience in the field and would have found entry uneconomical at a lower price. o Other factors affecting supply: o Change in supply vs. change in quantity supplied Demand Curve – The quantity of a good that consumers are willing and able to buy at a given price. o The lower the price, the more consumers are able and willing to buy. o A lower price may also attract new consumers who were unable to buy the good before. o Other factors affecting demand: o Change in demand vs. change in quantity demanded Substitute Goods – Goods that are similar in nature. More specifically, goods are substitutes when changes in price of one good and changes in demand for the other good move in the same direction. Complement Goods – Goods that are consumed with one another. More specifically, goods are complements when changes in price of one good and changes in demand for the other good move in opposite directions. Section 2.2 – The Market Mechanism Equilibrium – The demand and supply curves intersect at equilibrium (market-clearing price). Market mechanism – the tendency in a free market for the price to change until the market clears. No excess demand or supply.
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Surplus – Excess supply due to a price being higher than equilibrium. Producers will lower price until market clears. Shortage – Excess demand due to a price being lower than equilibrium. Consumers will bid up price until market clears. The market model assumes that the market is competitive. No one seller or buyer can
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BPUB250 Spring 2008 - Chapter 2 - The Basics of Supply and Demand

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