Topic03 - Supply and demand: an introduction 3. Supply and...

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1 3. Supply and demand Supply and demand: an introduction ± How do consumers get the goods and services they want in the right quantities and qualities? ² Some goods and services are allocated by the market forces of supply and demand. ± Why do some goods and services have shortages or surpluses and others do not? ² Some goods and services are regulated by government. What, how and for whom? Central planning versus the market ± Three problems all economic systems must address ² What should be produced? ² How should it be produced? ² For whom will it be produced? What, how and for whom? Central planning versus the market ± Centralised economic organisations ² Former Soviet Union ² Cuba ² North Korea ² Pre-1978 China ² Post-1978 China? ² Bureaucracy What, how and for whom? Central planning versus the market ± Central planning means a small number of individuals address ² What ³ Establish production targets for factories and farms. ² How ³ Plan how to achieve the goals. ² For whom ³ Distribute the goods and services produced. What, how and for whom? Central planning versus the market ± Free-market or capitalist economic systems ² Individual choices determine: ³ Which careers to pursue ³ Which products to produce or buy ³ When to start and shut down a business ³ Who gets what, which is decided by individual preferences and purchasing power
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2 Buyers and sellers in markets ± The market for any good or service consists of all the buyers and sellers of that good or service. ² In the market for pizza: ³ sellers comprise the individuals and firms that sell pizza, ³ buyers include all individuals who buy, or might buy pizza. Buyers in markets ± The demand curve ² A representation of the relationship between the amount of a particular good or service that buyers want to purchase and the price of the good or service. Buyers in markets ² A property of demand is that as the price of a good or service goes down, the quantity consumers wish to buy will increase. Therefore, the demand curve is downward sloping. ² Determinants of a downward-sloping demand curve ³ Substitution effect ³ Income effect ³ Buyer’s reservation price The daily demand curve for pizza in Perth Price ($ per slice) Quantity (1000s of slices per day) 4 2 3 81 21 6 Demand Buyers in markets ± The substitution effect ² The change in the quantity demanded of a good or service caused by a change in price, which results because the good or service becomes more or less expensive relative to other goods and services. ± The income effect ² The change in the quantity demanded of a good or service caused by a change in price, which results because of a change in purchasing power of a buyer’s income. Buyers in markets ± The reservation price: “willingness to pay” ² Based on the cost-benefit principle, if the reservation price (benefit) exceeds the market price (cost) the consumer will purchase the good.
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Topic03 - Supply and demand: an introduction 3. Supply and...

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