Chapter 2 Demand and Supply

Chapter 2 Demand and Supply - CHAPTER 2 NOTES-MODULES 2...

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CHAPTER 2 NOTES-MODULES 2 Lecture Notes Here are some lecture notes to supplement the textbook. LECTURE NOTES I. Markets Defined A. 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. Product market involves goods and services. 5. Resource market involves factors of production. B. The goal of the chapter is to explain the way in which markets adjust to changes and the role of prices in bringing the markets toward equilibrium. II. Demand A. Demand is a schedule that shows the various amounts of a product consumers are willing and able to buy at each specific price in a series of possible prices during a specified time period. 1. Example of demand schedule. 2. The schedule shows how much buyers are willing and able to purchase at possible prices. 3. The market price depends on demand and supply. 4. 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. 2. Restated, there is an inverse relationship between price and quantity demanded. 3. Note the “other things being constant” assumption refers to consumer income and tastes, prices of related goods, and other things besides the price of the product being discussed. 4. Explanation of the law of demand:
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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 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. The demand curve: 1. Illustrates the inverse relationship between price and quantity. 2. The downward slope indicates lower quantity (horizontal axis) at higher price (vertical axis), higher quantity at lower price. D. Individual vs. market demand: 1. Transition from an individual to a market demand schedule is accomplished by summing individual quantities at various price levels. 2. Market curve is horizontal sum of individual curves. E. Class example: This is a good place to involve the class if your classroom setting allows. Select an item that students typically buy, such as a can of soft drink or donuts. It works especially well if one student already has the item, and you can use that student for your individual demand schedule. Select five to ten representative prices for the item and create a demand schedule based
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Chapter 2 Demand and Supply - CHAPTER 2 NOTES-MODULES 2...

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