macsg03 - 3 Demand, Supply, and Market Equilibrium C hapter...

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59 3 Demand, Supply, and Market Equilibrium C hapter objectives: 1. Define and apply quantity demanded and quantity supplied, and state the law of demand and the law of supply. 2. Draw and interpret demand and supply graphs. 3. Identify the determinants of demand and supply and indicate how each must change for demand and supply to increase or decrease. 4. Derive market demand and market supply curves from individual demand and supply schedules. 5. Differentiate between a shift of a demand curve or supply curve and a movement along a curve, and depict these cases correctly on a graph. 6. Provide explanations for the slope of a typical demand curve. 7. Distinguish the relationship that exists between two goods that are substitutes and the relationship that exists between two goods that are complements. 8. Distinguish between a good that is normal and a good that is inferior. 9. Determine equilibrium price and quantity and detail the process by which the market moves from one equilibrium situation to another when demand or supply shifts. 10. Define excess demand (shortage) and excess supply (surplus) and predict their effects on the existing price level. The single best piece of advice, particularly for this essential chapter, is “practice, practice, practice.” A second piece of advice must be “draw, draw, draw.” Don’t be put off by the graphs—develop a solid intuitive feel for demand and supply by talking your way through how the market should behave. In most of the multiple-choice questions in this chapter, the first thing to do is to sketch a demand and supply picture. Graphs are an effective and timesaving tool for organizing your analysis. Cultivate the habit of asking “What should happen to demand?” and “Will this make supply increase or decrease?” Predict whether price should rise or fall in a given circumstance (common sense
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60 Study Guide to Principles of Macroeconomics should carry you a long way here). Don’t try to avoid graphs—they’ll make your course a lot easier and more rewarding. If you have some initial problems, check the Appendix to Chapter 1 and the “Learning Tips” in this Guide. BRAIN TEASER I: During the past ten years, the price of cell phones has fallen, while the numbers sold have increased. Is this a contradiction of the law of supply? How could you best explain this phenomenon, in words and graphically? SOLUTION: The answer to this and subsequent brain teasers will be found after our discussion of the learning objectives and before the Practice Tests. BRAIN TEASER II: Many large firms (McDonald’s, for example) perform research in order to determine where best to locate new branches. Suppose you’re responsible for choosing your burger company’s next location. Which factors would be important in your deliberations?
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macsg03 - 3 Demand, Supply, and Market Equilibrium C hapter...

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