TUTORIAL 3 - TUTORIAL 3 WEEK 4 SUPPLY AND DEMAND; AN...

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TUTORIAL 3 WEEK 4 SUPPLY AND DEMAND; AN INTRODUCTION Reading Text: Ch 3 Review Questions: 3 and 4 3. When we interpret the demand curve from a horizontal perspective we start with price on the vertical axis and read the corresponding quantity demanded on the horizontal axis. This is consistent with the demand curve telling us how much of a good buyers want to purchase in a given period of time at various prices. The demand curve can also be interpreted in a second way, which is to start with quantity on the horizontal axis and then read the marginal buyer’s reservation price on the vertical axis. This vertical perspective is consistent with the demand curve showing marginal benefits and being used to measure the gains to consumers of being able to participate in the market. 4 When price is below its equilibrium level the quantity that buyers want to purchase exceeds the quantity that sellers are willing to offer for sale. There is excess demand or a shortage. Frustrated buyers will respond by bidding up the good’s price which will, in turn, result in an increase in the quantity of the good supplied and a decrease in the quantity of the good demanded. If the price of the good were prevented by regulations from rising, we would expect to see symptoms of excess demand, such as queues and illegal trading of the good. When price is above its equilibrium level, the quantity that buyers want to purchase falls short of the quantity that sellers are willing to offer for sale. There is excess supply or a surplus. Frustrated sellers will respond by lowering the good’s price which will, in turn, result in a decrease in the quantity of the good supplied and an increase in the
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TUTORIAL 3 - TUTORIAL 3 WEEK 4 SUPPLY AND DEMAND; AN...

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