Supply_Demand - Notes II DEMAND, SUPPLY, AND MARKET...

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Notes II DEMAND, SUPPLY, AND MARKET EQUILIBRIUM I. DEMAND A. DEMAND is defined as the ability and willingness to buy specific quantities of a good at alternative prices in a given time period. 1. A demand schedule is a table that tells us how many units of a good or service a buyer will be willing and able to purchase during some period of time at various prices. 2. A demand curve is a graph that tells us how many units of a good or service a buyer will be willing and able to purchase during some period of time at various prices. 3. Both a demand schedule and a demand curve provide the same information, but in a different format. 4. The market demand schedule (or curve) is the combination of individual demand schedules (or curves). 5. An example of a hypothetical market demand schedule is shown in Table 1.2 and corresponding demand curve in Figure 1.2 below: a) Price is generally shown on the vertical axis. b) Quantity is generally shown on the horizontal axis. c) Increments along the vertical axis must be constant. d) Increments along the horizontal axis must be constant. e) For a given market price, one can "read" the quantity demanded at that price from the graph. f) For a given quantity demanded, one can "read" the market price at that quantity from the graph. Table 1.2 Demand Schedule Price Q demanded $10 0 8 4 6 7 4 9 2 11 1 12 0 13 Figure 1.2 Demand Curve $0 $2 $4 $6 $8 $10 0 2 4 6 8 10 12 14 16 18 20 Quantity Demanded Price
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B. THE LAW OF DEMAND states that with everything remaining constant except the price of the product, a rise in the price will result in a decrease in the quantity purchased and a reduction in the price will result in an increase in the quantity purchased. 1. There is an inverse relationship between the price of a product and the quantity that will be purchased, all else remaining constant. 2. Reasons for the validity of the LAW OF DEMAND: a) When purchases of a good or service increase, each additional unit of the good or service will yield less additional satisfaction than given by the previous unit - said to be diminishing marginal utility . b) When the price of a product falls, we can afford to purchase more - our real income has increased - and when the price of a product rises, we can not afford to purchase as much - our real income has decreased - this is called the income effect . c) When the price of a product falls, we will use it for more purposes and when the price of a product rises, we will find we can do without it for some purposes - this is called the substitution effect . C. ALL ELSE REMAINING CONSTANT ASSUMPTION ( ceteris paribus ) requires that the only thing that changes is price - any change in a non-price determinant of demand will result in a CHANGE IN DEMAND 1. If there is a change in one of the non-price determinants of demand, the entire demand schedule or demand curve will shift - there will be a completely new demand schedule or curve. 2.
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Supply_Demand - Notes II DEMAND, SUPPLY, AND MARKET...

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