Lovewell6e_Ch02 - C HA PTE R 2 Demand and Supply E ach day we buy an assortment of goods and servicesa meal a snack maybe a magazine What determines the

Lovewell6e_Ch02 - C HA PTE R 2 Demand and Supply E ach day...

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2 CHAPTER LEARNING OBJECTIVES After this chapter, you will be able to Demand and Supply E ach day, we buy an assortment of goods and services—a meal, a snack, maybe a magazine. What determines the price of the pizza slice we buy at lunchtime? the selection of chocolate bars we find at our local variety store? the types of software apps available for our cell phone? The answer to all these questions is demand and supply. These two powerful forces are the economic equivalents of gravity—never seen, but always exerting their influence in the most visible ways. In this chapter, we will study the impact of these two forces on our daily lives by seeing how they operate in individual markets. We will also gain a better appreciation of how the “invisible hand” of competition coordinates the plans of buyers and sellers, nudged along by the interaction of demand and supply. Teach a parrot to say demand and supply, and you’ve created an economist. — OLD JOKE LO 3 LO 1 LO 2 Describe the nature of demand, changes in quantity demanded, changes in demand, and the factors that affect demand Summarize the nature of supply, changes in quantity supplied, changes in supply, and the factors that affect supply Explain how markets reach equilibrium—the point at which demand and supply meet
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34 PART 1 Working with Economics A product market exists wherever households and businesses buy and sell consumer products—either face-to-face, or indirectly by mail, telephone, or online. Some markets, such as the market for crude oil, are global in scope. Others, such as the market for hot dogs at a local baseball game, are tiny by comparison. What Is Demand? Because households are buyers in product markets, their behaviour can be analyzed using the concept of demand , which is the relationship between the various possible prices of a product and the quantities consumers will purchase at each price. In this relationship, price is the independent variable. Quantity demanded —the amount of the product that consumers are willing to purchase at each price—is the dependent variable. To isolate the relationship between these two variables, all other factors affecting price and quantity demanded are assumed to remain constant. Recall that this is the assumption of ceteris paribus —“all other things remaining the same.” The Law of Demand Is the relationship between price and quantity demanded direct or inverse? To answer this question, consider the example of strawberries you might eat during a month. As shown in the table in Figure 2.1, you might buy two kilograms per month when each kilogram is priced at $2. If the price rises to $2.50, you will likely purchase fewer straw- berries, perhaps one kilogram per month at this new price. Conversely, if the price falls to $1.50, you will probably buy more strawberries per month. At this lower price, straw- berries become a better deal in terms of the satisfaction you get from each dollar spent.
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