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Lecture 2 notes - Supply and Demand Chapter Review...

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BE 530 Page 1 of 6 Supply and Demand: Chapter Review Introduction In a market economy, supply and demand determine both the quantity of each good produced and the price at which each good is sold. In this module, we develop the determinants of supply and demand. How changes in supply and demand alter prices and change the allocation of the economy’s resources? We also address the impact of government interventions in the market place. Finally, we recognize that the supply and demand model can only be applied to competitive markets. Demand The behavior of buyers is captured by the concept of demand. The quantity demanded is the amount of a good that buyers are willing and able to purchase. While many things determine the quantity demanded of a good, the price of the good plays a central role. Other things equal, an increase in the price of a good reduces the quantity demanded. This negative relationship between the price of a good and the quantity demanded of a good is known as the law of demand. The demand schedule is a table that shows the relationship between the price of a good and the quantity demanded. The demand curv e is a graph of this relationship with the price on the vertical axis and the quantity demanded on the horizontal axis. The demand curve is downward sloping due to the law of demand. Market demand is the sum of the quantities demanded for each individual buyer at each price. That is, the market demand curve is the horizontal sum of the individual demand curves. The market demand curve shows the total quantity demanded of a good at each price, while all other factors that affect how much buyers wish to buy are held constant. Shifts in the demand curve: When people change how much they wish to buy at each price, the demand curve shifts. If buyers increase the quantity demanded at each price, the demand curve shifts right which is called an increase in demand . Alternatively, if buyers decrease the quantity demanded at each price, the demand curve shifts left which is called a decrease in demand . The most important factors that shift demand curves are: Income: A normal good is a good for which an increase in income leads to an increase in demand. An inferior good is a good for which an increase in income leads to a decrease in demand. Prices of Related Goods: If two goods can be used in place of one another, they are known as substitutes. When two goods are substitutes, an increase in the price of one good leads to an increase in the demand for the other good. If two goods are used together, they are known as complements. When two goods are
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BE 530 Page 2 of 6 complements, an increase in the price of one good leads to a decrease in the demand for the other good. Tastes: If your preferences shift toward a good, it will lead to an increase in the demand for that good.
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