HUBBARD_MICRO_SG_03

HUBBARD_MICRO_SG_03 - Chapter 3 Where Prices Come From: The...

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Unformatted text preview: Chapter 3 Where Prices Come From: The Interaction of Demand and Supply Chapter Summary The model of demand and supply explains how prices are determined in a market system. The main factor affecting the demand for a product is its price. A demand schedule is a table that lists various prices of a product and the quantities that would be demanded at those prices. A demand curve shows this same relationship in a graph. The law of demand is the negative relationship between price and quantity demanded , holding everything else constant. A change in the price of the product causes a movement along the demand curve and is called a change in the quantity demanded. Other factors that affect demand include prices of related goods ( substitutes and complements ), income, tastes, population and demographics , and expected future prices. A change in any of these will shift a products demand curve and is called a change in demand. The most important factor affecting the supply of a product is its price. A supply schedule is a table that lists various prices of a product and the quantities that would be supplied at those prices. A supply curve shows this same relationship in a graph. The law of supply is the positive relationship between price and quantity supplied , holding everything else constant. A change in the price of the product causes a movement along the supply curve and is called a change in the quantity supplied. Other factors that affect supply include prices of inputs, technological change, prices of substitutes in production, expected future prices, and the number of firms in the market. In response to a change in any one of these factors, there will be a change in supply or a shift in the supply curve. The equilibrium price is the price that will make the quantity demanded be equal to the quantity supplied. This occurs where the supply curve and demand curve intersect. A surplus exists when the price charged is above the equilibrium price. A shortage exists when the price charged is below the equilibrium price. When the market price is not the equilibrium price, the price will adjust toward the equilibrium price. When the price charged equals the equilibrium price, both consumers and producers are willing to exchange the same quantity of the product and there is no further movement in the market price. An increase in demand increases equilibrium price and increases the equilibrium quantity. A decrease in demand decreases equilibrium price and decreases the equilibrium quantity. An increase in supply decreases equilibrium price and increases the equilibrium quantity. A decrease in supply increases equilibrium price and decreases the equilibrium quantity. CHAPTER 3 | Where Prices Come From: The Interaction of Demand and Supply 56 Learning Objectives When you finish this chapter, you should be able to: 1. Discuss the variables that influence demand . Many factors influence the willingness of consumers to buy a particular product. Among these factors are the income they have to spend and the to buy a particular product....
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HUBBARD_MICRO_SG_03 - Chapter 3 Where Prices Come From: The...

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