4 chapter4 - Chapter 4 Market Forces of Supply and Demand...

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Chapter 4: Market Forces of Supply and Demand Demand Imagine that authorities announce that a hurricane is going to hit College Station in 3 days and our city need to be evacuated. Authorities established that the destiny of all flights leaving C.S. is the closest safe city. You have the option of drive to a safe location. In this case you will find a huge line when you go to buy gas. Also, because so many people are leaving the city, you expect to spend something between 15 to 24 hours in the traffic but you are not sure about this time interval. In a context like that, HOW MUCH WOULD YOU PAY FOR ONE FLIGHT TICKET? Before you answer that, think about your financial restrictions and your preferences about driving and flying in the described context. If we ask that question to everybody that is possibly interested in buy a flight ticket and repeat the above procedure we have what economists call the demand schedule. The demand schedule is a table that shows the relationship between the price of the good and the quantity demanded. Here, we are assuming that all other things (that are not the price of the good or service in consideration) that can affect the quantity demanded remain constant. Imagine we asked this question to everybody that can possibly be interested in buy a flight ticket and we observed a demand schedule like the one bellow. DEMAND SCHEDULE FOR TICKETS Price of flight tickets in dollars Quantity of flight tickets demanded 1500 2500 1000 3000 750 4000 500 5500 250 7500 100 10000 We can represent the demand schedule in a graph. The demand curve is a graph of the relationship between the price of a good and the quantity demanded. Quantity of flight tickets Price of flight ticket in dollar 0 200 400 600 800 1000 1200 1400 1600 0 2000 4000 6000 8000 10000 12000 1
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Quantity demanded is the amount of a good that buyers are willing and able to purchase. In our example, as the price rises, the quantity demanded of flight tickets falls. The cases in which we could possibility observe an upward slope of the demand curve are so rare that in practice we can ignore them. The law of demand states that, other things equal, the quantity demanded of a good falls when the price of the good rises. Would you change your answer about the maximum price you would pay for a flight ticket if recent updates about the hurricane inform that it is going to hit C.S. in 1 day and not in 3 days as they expected? Probably more people would buy flight tickets at any given price. Imagine that after this new information the demand schedule is now DEMAND SCHEDULE FOR TICKETS Quantity of flight tickets demanded Price of flight tickets in dollar before the change in forecast after the change in forecast 1500 2500 5000 1000 3000 6000 750 4000 8000 500 5500 11000 250 7500 15000 100 10000 20000 For each price, now more people would buy flight tickets. The demand is greater for any given price. After the change in expectations we have now a new demand curve. This shift in the demand curve shows the change in the demand at any given price. This can be represented
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4 chapter4 - Chapter 4 Market Forces of Supply and Demand...

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