Chapter 4 Notes - [ChapterFour SupplyandDemand...

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[Chapter Four] Supply and Demand Learning Objectives After reading the material in this chapter, you will be able to do the following: 1. State the law of demand and draw a demand curve from a demand table. 2. Explain the importance of substitution to the laws of supply and demand. 3. Distinguish shifts in demand from movements along a demand curve. 4. State the law of supply and draw a supply curve from a supply table. 5. Distinguish shifts in supply from movements along a supply curve. 6. Explain how the law of demand and the law of supply interact to bring about equilibrium. 7. Show the effect of a shift in demand and supply on equilibrium price and quantity. 8. State the limitations of demand and supply analysis. Chapter Outline Supply and Demand “Supply” and “demand” are the two most-used words in economics. Demand To demand something means to be willing and able to buy it. Therefore, people demand fewer things than they want. The quantity of a good you desire varies inversely with the price of the good. The invisible hand (the price mechanism) is how the market coordinates individuals' desires: when goods become scarce, their prices are higher, so people buy less; when goods are abundant, their prices are lower, so people buy more.
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The Law of Demand Law of Demand : “quantity demanded rises as price falls, other things constant.” Or: “quantity demanded falls as price rises, other things constant.” Example: if the price of MP3 files rises but the price of CDs stays the same, people will be more likely to buy music on CD. Real-world example: when North Carolina raised the price of vanity plates from $30 to $40, the quantity demanded fell from 60,334 to 31,122. The Demand Curve Demand Curve : “the graphic representation of the relationship between price and quantity demanded.” Price is given on the vertical axis; quantity demanded is on the horizontal axis. The demand curve slopes downward because of the law of demand. “Other things constant” is an important part of the law of demand. An example is given wherein both the price of cars and the number of cars purchased rise. The paradox is resolved when it is discovered that incomes also rose. Increasing prices would tend to decrease the number of cars purchased, whereas increasing income would tend to increase it. In this case, the effect from income must have outweighed the effect of price. The “other things” are: tastes, other prices, and even the weather. Shifts in Demand versus Movements along a Demand Curve Demand : “a schedule of quantities of a good that will be bought per unit of time at various prices, other things constant.” Quantity Demanded : “a specific amount that will be demanded per unit of time at a specific price, other things constant.” In graphical terms: “demand” is the entire demand curve; “quantity demanded” refers to a point on the demand curve.
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