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Unformatted text preview: CHAPTER THREE UNDERSTANDING INDIVIDUAL MARKETS: DEMAND AND SUPPLY INSTRUCTIONAL OBJECTIVES After completing this chapter, students should be able to: 1. Differentiate between demand and quantity demanded; and supply and quantity supplied. 2. Graph demand and supply curves when given demand and supply schedules. 3. State the Law of Demand and the Law of Supply. 4. List the major determinants of demand. 5. List the major determinants of supply. 6. Explain the concept of equilibrium price and quantity. 7. Illustrate graphically equilibrium price and quantity. 8. Explain the effects of changes in demand and supply on equilibrium price and quantity. 9. Explain the effects of a price change for one good on the demand for its substitutes or complements. 10. Give an example of the rationing function of prices. 11. Explain briefly how concepts of supply and demand apply to resource markets. 12. Define and identify terms and concepts listed at the end of the chapter. LECTURE NOTES I. Markets Defined A. A market is an institution or mechanism which brings together buyers (demanders) and sellers (suppliers) of particular goods and services. 1. May be local, national, international in scope. 2. Some markets are highly personal, face-to-face exchanges others are impersonal and remote. 3. This chapter concerns purely competitive markets with a large number of independent buyers and sellers. 4. Product market involves goods and services. 5. Resource market involves factors of production. B. Chapters goal is to explain mechanics of prices. Demand 29 Understanding Individual Markets: Demand and Supply A. Demand is a schedule which shows the various amounts of a product consumers are willing and able to buy at each specific price in a series of possible prices during a specified time period. 1. Example of demand schedule for corn is Table 3-1. Page__43 Week of _____________________ Price ( per bushel) Quantity (demanded per week) 5 10 4 20 3 35 2 55 1 80 2. Schedule shows how much buyers are willing and able to buy at five possible prices. 3. The market price depends on demand and supply. 4. To be meaningful the demand schedule must have a period of time associated with it. B. Law of demand is a fundamental characteristic of demand behavior. 1. Other things being equal , as price increases, the corresponding quantity demanded falls. P Q or P Q 2. Restated, there is an inverse relationship between price and quantity demanded. 3. Note the other things being constant assumption which refers to constant prices of related goods, income, tastes, and other things besides price. 4. Explanation of the law of demand: a. Diminishing marginal utility : The decrease in added satisfaction that results as you have increased amounts of a good or service. The second Big Mac yields less satisfaction (or utility) than the first....
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This note was uploaded on 07/09/2008 for the course ECON 102 taught by Professor Hewit during the Summer '07 term at Philadelphia Biblical.
- Summer '07