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Chapter%203%20PPT%20Student[1] - Chapter 3 Where Prices...

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Chapter 3 Where Prices Come From: The Interaction of Demand and Supply
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In the model of demand and supply, we assume that the market is competitive in the sense that: The product or service is homogeneous (“the same”). No individual buyer or seller can affect the prevailing market price. There is free entry and exit of buyers and sellers into and out of the market. We look first at demand, then at supply, then at equilibrium, and finally we examine the effects of changes in supply and demand.
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The Demand Side of the Market We use demand schedules (numerical tables) and demand curves (graphs) to show the relationship between the price of a product and the quantity demanded of that product. This relationship is termed the “law of demand”. The law of demand says that, ceteris paribus, as the price of a good increases, the quantity demanded of the good Note the quantity demanded is the amount of a good or service that a consumer is ____________ and _________ to purchase at a given price.
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What Explains the Law of Demand? Substitution effect The change in the quantity demanded of a good that results from a change in price, making the good more or less expensive relative to other goods that are substitutes. Income effect The change in the quantity demanded of a good that results from the effect of a change in the good’s price on consumers’ purchasing power.
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Price (per Taco) Q d of Tacos $0.50 5000 $1.00 4500 $1.50 4000 $2.00 3500 $2.50 3000 $3.00 2500
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Changes in quantity demanded are movements along a demand curve and are caused by Changes in demand are shifts of the demand curve and are caused by changes in “non- price” determinants of demand Price Quantity D 1
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