Chapter 4 - Chapter 4 Supply and Demand The big picture...

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Unformatted text preview: Chapter 4 Supply and Demand The big picture This chapter tries to answer the following questions: • Why most of the good and services available in market are in the right quantities and qualities? • Why, on the other hand, do some goods and services have shortages or surpluses and other don’t? • How the prices of goods and services are determined What, How and For Whom? Central planning versus the market All economies must answer the following questions: • What should be produced? SUVs or/and Small Cars. • How should it be produced? Using more human labor or using more machines. • For whom will it be produced? To be consumed to the wealthy or poor • Where are goods and services produced? Do we produce in the US or Mexico • When are goods and services produced? When to increase or decrease production In primitive agrarian societies, or in societies such as the former Soviet Union, or in countries such as Cuba, North Korea, and China a small number of individuals (bureaucrats) address these concerns by: • Establishing production targets for factories and farms • Planning how to achieve the goals, • Distributing the goods and services produced In free market (capitalists) economies individual preferences determine: • Which careers to pursue • Which products to produce or buy • When to start businesses • Who gets what Buyers and Sellers in Markets We need to explore how the interactions among buyers and sellers in markets determine the prices and quantities of the various goods and services traded in these markets. What is a market? A market is the collection of buyers and sellers that, through their actual or potential interactions, determine the price of a product or set of products. The price of any good is basically determined by two factors: • Cost of production • Value to the user The Demand Demand: It is the relationship between the price of a good or service and the quantity that consumers are willing and able to buy. Law of Demand: The price of a good or service is inversely related to the quantity demanded of that good or service: the higher the price, the smaller the quantity demanded; the lower the price, the greater the quantity demanded. Demand Curve : a downward sloping curve showing the quantity of a good that buyers wish to buy at each price. Figure 1 Demand for Pizza • As the price of Pizza decreases, people buy more pizza • It measures the buyers’ reservation price , the highest amount of dollars an individual is willing to pay for a good. The reservation price declines as you consume more of a good. • Substitution Effect : The change in the quantity demanded of a good that results because buyers switch to substitutes when the price of the good changes....
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This note was uploaded on 03/08/2011 for the course ECON 201 taught by Professor Azzam during the Spring '11 term at Alabama.

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Chapter 4 - Chapter 4 Supply and Demand The big picture...

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