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Krugman2e_SG_Ch03 - 057-104_Krugman2e_SG_CH03.qxp 11:09 AM...

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chapter 3 Supply and Demand BEFORE YOU READ THE CHAPTER Summary Chapter 3 describes a competitive market and then develops the model of supply and demand for this type of market. The chapter describes the demand and supply curves, explains the dis- tinction between movements along a curve versus a shift of the curve, discusses the primary determinants of supply and demand, and defines the meaning of equilibrium in this model. The chapter also discusses how a market eliminates shortages and surpluses through changes in price and quantity so that the market returns to its equilibrium. Chapter Objectives Objective #1. A competitive market is a market that has many buyers and many sellers of the same good or service. No buyer or seller can affect the price of the good or service in a competitive market. Objective #2. A demand schedule shows the relationship between possible prices of the good or service and the quantity of that good or service demanded at those different prices. As the price increases, the quantity demanded decreases: price and quantity demanded are inversely related to one another. A demand curve is the graphical representation of the demand schedule. The demand curve is drawn with the price of the good on the vertical axis and the quantity demanded on the horizontal axis. Demand curves usually slope downward: this is referred to as the “law of demand.” Demand refers to the entire demand curve, while quantity demanded refers to a specific quantity demanded at a specific price. Objective #3. The quantity demanded depends on many factors, but the primary determi- nants of the quantity demanded are the price of the good, the changes in the price of related goods, and changes in income, tastes, expectations, and the number of consumers. A change in the price of the good, holding everything else constant, will cause a movement along the curve and a change in the quantity demanded. A change in any other determinant of demand, holding everything else constant, will cause a shift in the demand curve. At any given price, the quantity demanded will increase when demand shifts to the right and decrease when demand shifts to the left. 57 057-104_Krugman2e_SG_CH03.qxp 9/5/08 11:09 AM Page 57
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Objective #4. The chapter discusses several kinds of specific types of goods. Two goods are substitutes if a decrease in the price of one of the goods causes a decrease in the demand for the other good. As the price of the first good decreases, people increase the quantity of this good they demand, which results in a reduction in the overall demand for the other, substitute good. Two goods are complements if a decrease in the price of one of the goods causes an increase in the demand for the other good. As the price of the first good decreases, people increase the quantity of this good they demand, which results in an increase in the overall demand for the other, complementary, good.
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