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Chapter3 - CHAPTER 3 Supply and Demand Theory One of the...

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CHAPTER 3 Supply and Demand: Theory One of the most famous and widely used theories in economics is the theory of supply and demand. This chapter examines supply and demand and the factors that affect supply and demand. It discusses disequilibrium and movements to market equilibrium, how changes in factors affect the market equilibrium, and the consequences of price ceilings and price floors. KEY IDEAS 1. Markets have two sides. One side of a market is the demand side and the other is the supply side. 2. Movements along a demand curve are called changes in quantity demanded, while shifts to new demand curves are called changes in demand. 3. Movements along a supply curve are called changes in quantity supplied, while shifts to new supply curves are called changes in supply. 4. Market adjustment will eliminate shortages and surpluses. 5. A change in a factor of demand or a factor of supply (or both) will change the point of market equilibrium in a predictable way. 6. Sometimes the government does not allow price to be a rationing device. CHAPTER OUTLINE I. DEMAND Demand refers to the willingness and ability of buyers to purchase different quantities of a good at different prices during a specific time period. A. The Law of Demand The law of demand states that as the price of a good rises, the quantity demanded of the good falls, and as price falls, quantity demanded rises, ceteris paribus . B. Four Ways to Represent the Law of Demand The law of demand can be represented in words, in symbols, in a demand schedule, and as a demand curve.
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