Chapter 3 - Chapter 3 Supply Demand and the Market Process...

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Unformatted text preview: Chapter 3 Supply, Demand, and the Market Process 7 Learning Goals 1) Investigate and describe consumer behavior 2) Distinguish a change in demand from a change in quantity demanded 3) Investigate and describe firm behavior 4) Distinguish a change in supply from a change in quantity supplied 5) Build a market model and illustrate how equilibrium is reached 6) Demonstrate how markets respond to changes in demand and supply 7) Recognize how prices and the invisible hand principle create market order Consumer Choice and the Law of Demand The Law of Demand: The inverse relationship between price and quantity demanded; when price rises, quantity demanded falls Quantity demanded is a number; it’s how many units of a good you bought Picture of this relationship: Why is the demand curve downward sloping? Diminishing Marginal Utility – The marginal benefit you receive from an item falls as you gain more of the item – The only way to get you to buy more is to lower the price How do consumers react to price changes? (1) When the price of one good falls, people substitute away from relatively more expensive goods to the relatively cheaper goods Called the substitution effect (2) When the price of one good falls, real consumer income rises so people buy more (it’s like getting a raise) Called the income effect Both of these also cause the demand curve to be downward sloping The demand curve represents your willingness to pay (your maximum price), not how much you actually paid What if the actual price is lower than your willingness to pay? In economics, we call this difference consumer surplus (CS) Graphically, CS is the area below demand, out to quantity, and down to price Graph of CS: Changes in Demand Versus Changes in Quantity Demanded Demand is the relationship between two variables:...
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This note was uploaded on 04/02/2012 for the course ECO 2023 taught by Professor Joecalhoun during the Spring '12 term at Florida State College.

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Chapter 3 - Chapter 3 Supply Demand and the Market Process...

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