ch04 - Chapter4 4 THEMARKETFORCESOF SUPPLYANDDEMAND...

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The Market Forces of Supply and Demand WHAT’S NEW IN THE THIRD EDITION: This chapter has been completely rearranged and rewritten. LEARNING OBJECTIVES: By the end of this chapter, students should understand: what a competitive market is. what determines the demand for a good in a competitive market. what determines the supply of a good in a competitive market. how supply and demand together set the price of a good and the quantity sold. the key role of prices in allocating scarce resources in market economies. CONTEXT AND PURPOSE: Chapter 4 is the first chapter in a three-chapter sequence that deals with supply and demand and how  markets work. Chapter 4 shows how supply and demand for a good determines both the quantity  produced and the price at which the good sells. Chapter 5 will add precision to the discussion of supply  and demand by addressing the concept of elasticity—the sensitivity of the quantity supplied and quantity  demanded to changes in economic variables. Chapter 6 will address the impact of government policies on  prices and quantities in markets. 51 4 THE MARKET FORCES OF  SUPPLY AND DEMAND
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52   Chapter 4/The Market Forces of Supply and Demand The purpose of Chapter 4 is to establish the model of supply and demand. The model of supply and  demand is the foundation for the discussion for the remainder of this text. For this reason, time spent  studying the concepts in this chapter will return benefits to your students throughout their study of  economics. Many instructors would argue that this chapter is the most important chapter in the text.
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Chapter 4/The Market Forces of Supply and Demand   53 KEY POINTS: 1. Economists use the model of supply and demand to analyze competitive markets.  In a competitive  market, there are many buyers and sellers, each of whom has little or no influence on the market  price. 2. The demand curve shows how the quantity of a good demanded depends on the price.  According to  the law of demand, as the price of a good falls, the quantity demanded rises.  Therefore, the demand  curve slopes downward. 3. In addition to price, other determinants of how much consumers want to buy include income, the  prices of substitutes and complements, tastes, expectations, and the number of buyers.  If one of  these factors changes, the demand curve shifts.
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