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Chapter 3 Handout

Principles of Microeconomics + DiscoverEcon code card

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Chapter 3 Demand, Supply and Market Equilibrium I. Markets Defined A market is an institution or mechanism that brings together buyers (demanders) and sellers (suppliers) of particular goods and services. 1. A market may be local, national, or international in scope. 2. Some markets are highly personal, face-to-face exchanges; others are impersonal and remote. 3. This chapter concerns purely competitive markets with a large number of independent buyers and sellers. 4. A product market involves goods and services. 5. A resource market involves factors of production. II. Demand A. Demand is a schedule or curve that shows the various amounts of a product that consumers are willing and able to buy at each specific price in a series of possible prices during a specified time period. The schedule shows how much buyers are willing and able to purchase at five possible prices. To be meaningful, the demand schedule must have a period of time associated with it./ B. Law of demand is a fundamental characteristic of demand behavior. 1. Other things being equal, as price increases, the corresponding quantity demanded falls. (an inverse relationship between price and quantity demanded ). 3. Note the “other-things-equal” (all else constant) assumption refers to consumer income, tastes, preferences, expectations, prices of related goods, and other things besides the price of the product being discussed. 4. Explanation of the law of demand 1
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Chapter 3 Demand, Supply and Market Equilibrium a. Diminishing marginal utility : The decrease in added satisfaction that results as one consumes additional units of a good or service, i.e., the second “Big Mac” yields less extra satisfaction (or utility) than the first. b. Income effect : A lower price increases the purchasing power of money income, enabling the consumer to buy more at a lower price (or less at a higher price). c. Substitution effect : A lower price gives an incentive to substitute the lower- priced good for now relatively higher-priced goods. C. There are several determinants of demand or the “other things,” besides price, which affect demand. a. Tastes—-favorable change leads to an increase in demand; unfavorable change to a decrease. b. Number of buyers—more buyers lead to an increase in demand; fewer buyers lead to a decrease. c. Income—more leads to an increase in demand; less leads to a decrease in demand for normal goods. (The rare case of goods whose demand varies inversely with income is called inferior goods).
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Chapter 3 Handout - Chapter 3 Demand Supply and Market...

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