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Unformatted text preview: Investment Tools: Economics: Microeconomic Analysis 1.A: Preliminary Reading: Supply, Demand, and the Market Process a: Explain the laws of supply and demand. All else held constant, a higher price will increase the supply of goods produced and offered for sale. Existing producers will produce more, and new suppliers will enter the market. The law of supply states that there is a direct relationship between the price of a good and the amount of that good that will be supplied in the market place. Peoples desire for goods exceeds the purchasing power of their incomes. This forces them to make choices. People will choose those alternatives that enhance their welfare most relative to their cost. An increase in the cost of an item relative to alternative consumption choices reduces the likelihood of purchasing that item. Higher prices reduce the demand for an item and lower prices raise the demand for an item. This is called the law of demand . The availability of substitutes is the main reason that consumers buy less of a product as its price increases. Substitutes are goods that perform similar functions. The law of demand states that there is an inverse relationship between the price of a good and the amount buyers are willing to purchase. Market demand schedule : The demand curve will slope downward to the right, indicating that the number of units demanded will increase as the price declines. Some goods are much more responsive to changes in price than others. The greater the number of viable substitutes for a good the more responsive demand is to price. When interpreting the demand curve, remember that we have assumed that factors other than price, such as consumer income, have not changed significantly b: Discuss how market prices respond to changes in supply and demand. A market is the environment that encompasses the trading arrangements of buyers and sellers that underlie the forces of supply and demand. Equilibrium occurs when the conflicting forces creating supply and demand are in balance. In the absence of shifts in supply and demand curves, if the price is so high that supply exceeds demand, some businesses will decrease their prices to sell their excess inventory while others elect to reduce production. The result is a reduction in both price and supply until the market is in equilibrium. Conversely, if demand exceeds supply, the price of the product will rise, resulting in reduced demand as consumers find substitutes and increased supply as producers add capacity. This will occur until the market is in equilibrium. c: Explain the difference between shifts in and movements along supply and demand curves. The demand curve isolates the impact that price has on the amount of a product purchased. A movement along a specific demand curve shows a change in quantity demanded resulting from a change in price. d: Discuss the factors that cause a demand curve to shift....
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- Fall '08