Ec100A Ch2 - 2 SUPPLY AND DEMAND Econ 100A Mortimer The...

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SUPPLY AND DEMAND 2 Econ 100A Mortimer
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The Basics of Supply and Demand Understanding and predicting how changing world economic conditions affect market price and production Evaluating the impact of government price controls, minimum wages, price supports, and production incentives Determining how taxes, subsidies, tariffs, and import quotas affect consumers and producers Supply-demand analysis can be applied to a wide variety of interesting and important problems. To name a few: Econ 100A Mortimer
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SUPPLY AND DEMAND The Supply Curve Relationship between the quantity of a good that producers are willing to sell and the price of the good. We can write this relationship as an equation: Q S = Q S ( P ) Shifting the Supply Curve When production costs (e.g., wages, interest charges, and the costs of raw materials) decrease, output increases no matter what the market price happens to be. The entire supply curve thus shifts to the right. Economists often use the phrase change in supply to refer to shifts in the supply curve, while reserving the phrase change in the quantity supplied to apply to movements along the supply curve. Econ 100A Mortimer
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The quantity demanded may also depend on other variables, such as income, the weather, and the prices of other goods. For most products, the quantity demanded increases when income rises. A higher income level results in a shift to the right of the entire demand curve. SUPPLY AND DEMAND The Demand Curve Relationship between the quantity of a good that consumers are willing to buy and the price of the good. We can write this relationship between quantity demanded and price as an equation: Q D = Q D ( P ) Shifting the Demand Curve Econ 100A Mortimer
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SUPPLY AND DEMAND Shifting the Demand Curve substitutes Two goods for which an increase in the price of one leads to an increase in the quantity demanded of the other. e.g., Coke and Pepsi, butter and margarine, PC and Mac complements Two goods for which an increase in the price of one leads to a decrease in the quantity demanded of the other. e.g., peanut butter and jelly, HDTVs and HD cable/satellite broadcasting, milk and cereal Econ 100A Mortimer
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THE MARKET MECHANISM Equilibrium equilibrium ( or market clearing) price Price that equates the quantity supplied to the quantity demanded. market mechanism Tendency in a free market for price to change until the market clears. surplus Situation in which the quantity supplied exceeds the quantity demanded. shortage Situation in which the quantity demanded exceeds the quantity supplied. Econ 100A Mortimer
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THE MARKET MECHANISM When Can We Use the Supply-Demand Model? We are assuming that at any given price, a given quantity will be produced and sold. This assumption makes sense only if a market is at least roughly competitive .
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This note was uploaded on 04/24/2009 for the course ECON 100A taught by Professor Woroch during the Spring '08 term at University of California, Berkeley.

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Ec100A Ch2 - 2 SUPPLY AND DEMAND Econ 100A Mortimer The...

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