Chs12,13 - Chapter 12: Demand and Supply Price...

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Chapter 12: Demand and Supply Price Determination - the first step to determining the equilibrium price of an object is to superimpose the demand and supply curves on the same daigram. The price and quantity at which they intersect is the equilibrium price and equilibrium quantity of production. When the price of a product intersects the supply graph at a point higher than the equilibrium price, the quantity sold exceeds the quantity demanded >> hence there is a surplus. The converse is also true. SURPLUS CAUSES DOWNWARD PRESSURE ON PRICE. if the price is below the equilibrium, the quantity demanded is higher than the quantity supplied hence there is a shortage. SHORTAGE CAUSES AN UPWARD PRESSURE ON PRICE. Demand Shifts - As demand increases, both the equilibrium price and the equilibrium quantity increase. If the demand decreases, the equilibrium price and quantity decrease. (See the five different demand shifters) 1. Changes in money incomes: as the incomes of people increases, their demand for superior goods increases whereas the demand for inferior goods decreases. This leads to a shift in the equilibrium price and quantity. 2. Changes in Prices of Related goods: If the price of a substitute good increases, then the demand for that goods substitute will increase leading to an increase in demand. The converse is also true. An increase in the price of a complementary good leads to the demand for that good decreasing which makes sense >> However, the demand for that good's complement will also decrease causing the equilibrium price and quantity to decrease. The converse is also true.
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Chs12,13 - Chapter 12: Demand and Supply Price...

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