Chapter 3 notes

Chapter 3 notes - Demand, Supply, and Market Equilibrium...

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Demand, Supply, and Market Equilibrium CHAPTER THREE DEMAND, SUPPLY, AND MARKET EQUILIBRIUM LECTURE NOTES I. Learning objectives – In this chapter students will learn: A. What demand is and what affects it. B. What supply is and what affects it. C. How supply and demand together determine market equilibrium. D. How changes in supply and demand affect equilibrium prices and quantities. E. What government-set prices are and how they can cause product surpluses and shortages. II. Markets A. A market, as introduced in Chapter 2, is an institution or mechanism that brings together buyers (demanders) and sellers (suppliers) of particular goods and services. B. This chapter focuses on competitive markets with: 1. a large number of independent buyers and sellers. 2. standardized goods. 3. prices that are “discovered” through the interaction of buyers and sellers. No individual can dictate the market price. C. 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. III. Demand A. Demand is a schedule 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. 1. Example of demand schedule for corn is Figure 3.1. 2. The schedule shows how much buyers are willing and able to purchase at five 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-equal” 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: 41
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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 lower price (or less at a higher price) without having to reduce consumption of other goods . 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 (see corn example, Figure 3.1). 2.
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Chapter 3 notes - Demand, Supply, and Market Equilibrium...

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