GM545 Homework Solutions - Supply and Demand Price and...

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Supply and Demand Price and Demand / Supply It is critically important to understand Chapter 3 and the difference between a change in quantity demanded (quantity supplied) and demand (supply). PRICE NEVER AFFECTS DEMAND OR SUPPLY. Price is built into the curve, so when price changes you get a movement along the curve -- i.e. a change in quantity demanded or quantity supplied. When you say that demand or supply has changed, you are saying that the whole curve has shifted, and this is caused by one of the determinants of demand (or supply). Again, see Chapter 3 for an excellent discussion of this important aspect of our model of supply and demand. Remember that Supply is Market Supply. This is very important. Most markets have many firms supplying a particular product or service. Equilibrium means Market Equilibrium. Also, supply is not inventory. Supply is a schedule of prices and quantities. So, equilibrium is the intersection of the overall supply curve and demand curve for that market -- which sets a market equilibrium price (P*) and equilibrium quantity (Q*). An individual firm will want to sell as much as they can in that market -- their individual inventory and demand for their own individual product is not what we're referring to by equilibrium. Market Equilibrium I often read postings (even exam postings) that say as a seller we should try to create market equilibrium. Remember that sellers want to charge as much as they possibly can, and buyers want to get the good or service as cheaply as possible. It’s the MARKET forces of supply and demand that create equilibrium. There are two sides to every business: the production side and the buying side. In economics, "supply" refers to the production side, and "demand" refers to the buying
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side. It is important to keep these sides separate, at least at first. Chapter 3 lays out the basic elements of supply and demand. Make sure that you study that chapter carefully, and work through the problems that are assigned. Be sure you know the determinants of supply and demand, and how changes in those determinants can lead to supply and demand shifts. Also, be sure to understand the difference between a change in quantity demanded versus a change in demand, as well as a change in quantity supplied versus a change in supply. Market equilibrium is also an especially important topic, so be sure that you understand it thoroughly, especially in relation to what happens to the market equilibrium when supply and/or demand factors change over time, for whatever reason. Remember that there is a very important difference between a movement on or along the demand curve -- vs. a shift or movement OF the demand curve. The demand curve consists of prices and quantities -- it is a "picture" of a demand schedule of prices and quantities. So, when the price changes, you get a movement ALONG the curve. What shifts the demand curve are the shift factors like, changes in income, number of
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GM545 Homework Solutions - Supply and Demand Price and...

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