Chapter 4 Study Guide

Chapter 4 Study Guide - Chapter Four Using Supply and...

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Chapter Four Using Supply and Demand to Understand Markets The essence of a market is interaction among potential buyers and sellers. The Nature of a Market The Minimalist Market o The simplest market. One potential buyer and one potential seller. Two goods. Opposite Relative Valuations – There must be a sum of money that the buyer values less than the good but that the seller values more than the good. Identical Relative Valuations – At any price for which the quantity supplies is one, quantity demanded is zero. No exchange can take place. In a market with one seller and multiple potential buyers the good will go to the person who values it the most relative to money. In a market with one buyer and many would-be sellers competition between the sellers will drive the price down until it is above the lowest supply price , but is below the second-lowest supply price . In a market with many buyers and sellers: o The most capable buyer is the one with the highest demand price. o The most capable seller has the lowest supply price, o Bidding, either up from below or down from above, drives the price into the range at which quantity demanded equals quantity supplied. Smooth Curves o Each hypothetical price is associated with a unique quantity demanded and a unique quantity supplied. o There is only one price at which quantity supplied equals quantity demanded. Any price below it will be bid up; any above it will be bid down. Equilibrium Price – Price at which quantity demanded equals quantity supplied. P e Equilibrium Quantity – Quantity at which quantity demanded equals quantity supplied. Q e
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o Expansion of either the number of buyers or the number of sellers is likely to shrink the range of prices at which the quantity supplied equals the
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This note was uploaded on 04/18/2008 for the course ECON 201 taught by Professor Egger during the Fall '06 term at Towson.

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Chapter 4 Study Guide - Chapter Four Using Supply and...

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