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Supply and Demand Study Guide

Supply and Demand Study Guide - An Introduction to Supply...

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An Introduction to Supply and Demand The American Economy A Study Guide by George Diemer Overview Supply and Demand is a model that economists use to explain how markets operate. Markets are anyplace where buyers and sellers get together to exchange goods and services. If you do not feel comfortable using models (as most of us don’t at first) try using a little checklist. First think about the axis of the models. In this case they are Price on the “y” axis and Quantity on the “x” axis. Next determine what the lines (or curves) mean. They are the Supply and Demand curves and are defined below. The next step is to think of how the lines shift, again described below. Finally you should be able to tell as story by using the model. This should be your overall objective. It is not sufficient to say “income increases, so price and quantity increase”. You must connect the dots using the model such that “income increases, thus Demand increases (shifts right), therefore both Price and Quantity increase”. It is also important to understand the concept of “Ceteris Paribas ”. This is Latin for “all things being equal”. This refers to the fact that when considering any issue we hold down all other side effects of the argument. We simply examine the one issue presented to us.
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