Chapter 3 notes

Chapter 3 notes - Chapter 03 Demand Supply and Market...

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Chapter 03 - Demand, Supply, and Market Equilibrium (+ Appendix) CHAPTER THREE DEMAND, SUPPLY, AND MARKET EQUILIBRIUM (+ APPENDIX) LECTURE NOTES I. Learning objectives – After reading this chapter, students should be able to: A. Describe demand and how it can change. B. Describe supply and how it can change. C. Relate how supply and demand determine market equilibrium. D. Explain how changes in supply and demand affect equilibrium prices and quantities. E. Identify what government-set prices are and how they can cause product surpluses and shortages. F. (Appendix) Illustrate how supply and demand analysis can provide insights on actual- economy situations. 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. 3-1
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Chapter 03 - Demand, Supply, and Market Equilibrium (+ Appendix) 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: 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.
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Chapter 3 notes - Chapter 03 Demand Supply and Market...

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