CH2 Notes

CH2 Notes - 2. Demand and Supply Analysis 2.1 Demand,...

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8 | P a g e 2. Demand and Supply Analysis 2.1 Demand, Supply, and Market Equilibrium The main goal of this chapter is to analyze perfectly competitive markets. Recall that perfectly competitive markets involve large numbers of buyers and sellers, such that the transactions of any individual buyer or seller are so small in comparison to the overall volume of the good or service traded on the market that each buyer or seller “takes” the market price as given, otherwise known as price- taking behavior. The basic model for a perfectly competitive market is the demand and supply curve set up. Demand Curves: A market demand curve is a curve that shows us the quantity of goods that consumers are willing to buy at different prices. There are two types of demand that combine to created total demand of a good. h Derived demand is demand for a good that is derived from the production and sale of other goods. For example corn is demanded by companies such as General Mills that process it into other products, such as breakfast cereal. h Direct demand is demand for a good that comes from the desire of buyers to directly consume the good itself. There are several other factors that the quantity of a good demanded such as the price of related goods, consumer incomes, consumer tastes, and advertizing. The demand curve is typically drawn with price on the vertical axis and quantity on the horizontal axis; it is drawn assuming all other factors are fixed. You may recall from your principals class, that demand slopes downward, indicating that as price decreases the quantity demanded of a good increases. This inverse relationship between the price of a good and the quantity demanded, when all factors that influence demand are held fixed is referred to as the law of demand. Example: Learning-by-doing exercises 2.1 (Page 27)
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9 | P a g e Supply Curves: A market supply curve is a curve that shows us the total quantity of goods that their suppliers are willing to sell at different prices.
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CH2 Notes - 2. Demand and Supply Analysis 2.1 Demand,...

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