2023Ch3SumMcBr - Markets: Demand & Supply Chapter 3...

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Chapter 3
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Outline Markets Law of demand Non-price factors and demand Demand curve and shifts in demand Law of supply Non-price factors and supply Supply curve and shifts in supply Equilibrium, shortage and surplus Changes in equilibrium price and output Applications Price ceilings and price floors
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Markets There are many types of markets. The stock market, the market for computers, the market for teachers, the foreign exchange market and the money market are just a few examples. But every market has buyers (demand) confronting sellers (supply). Economists have two broad categories for markets: the product market and the resource market. Product markets are markets for goods and services. Resource markets are markets for the factors of production. Businesses demand resources and supply products. Households supply resources and demand products.
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Law of demand To understand markets, we must analyze each side separately. Let’s focus our attention on product markets and look at the demand side; then supply. Several factors influence your decision to buy. But the first thing you probably think about for any individual product is the price of that product. If the price falls, those in the market tend to buy more of that product than they did before. Economists would say that when price decreases “quantity demanded” increases (ceteris paribus), and when price increases “quantity demanded” decreases. This inverse relationship between price and quantity demanded is called the “law of demand.”
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Factors other than price that influence consumers’ decisions to buy a particular product include: Income Wealth Tastes and fashion Market population Expectations Prices of related good (substitutes; complements) If your income increases, you will buy more of some goods, but less of others. If your income increases and you buy more, then that good is classified as a normal good. If your income increases and you buy less, then that good is an inferior good. Non-price factors and demand
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Chicken wings vs. chicken breasts: if your income increases you would probably buy more chicken breasts (normal) and less chicken wings (inferior). If your income decreases, you would buy less chicken breasts (normal) and more chicken wings (inferior). With normal goods, there is a direct relationship between your income and how much you buy (income up, buy more; income down, buy less). With inferior goods, there is an inverse relationship between your income and how much you buy (income up, buy less; income down, buy more). Non-price factors and demand (continued)
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Wealth includes financial assets and property. If your wealth increases, you would demand more normal goods. If your wealth decreases, you would demand less normal goods. Many factors fall under tastes and fashion.
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2023Ch3SumMcBr - Markets: Demand & Supply Chapter 3...

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