The demand for clocks will fall and the demand for

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Unformatted text preview: favor of books. We know that a change in preferences affects the demand for both clocks and books. The demand for clocks will fall and the demand for books will rise. What happens to price in each case? As a result of the decreased demand for clocks, the price of clocks falls. Because of the lower price for clocks, the quantity supplied of EXHIBIT 6 -4 Changes Changes in Both Supply and Both Supply Demand Demand S1 S2 2 $400 Price 06 (128-153) EMC Chap 06 D2 1 $300 Sometimes supply and demand change at the same time. Here, although both demand and supply increase, demand increases more than supply. As a result, equilibrium price increases. D1 0 Quantity clocks falls. In other words, clock sellers will respond to the lower price for clocks by offering to sell fewer clocks. (The quantity supplied of clocks is lower at a lower price than at a higher price.) As a result of the increased demand for books, the price of books rises. Because of the higher price for books, book sellers will offer to sell more books. In other words, book sellers will respond to “Teach a parrot to say ‘supply and demand,’ the higher price of books by offerand you’ve got an ing to sell more books. (The quaneconomist.” tity supplied of books is higher at a — Economics joke higher price than at a lower price.) Notice how buyers are communicating with sellers. Buyers aren’t saying “produce fewer clocks and produce more books,” but the result is the same. Instead, buyers are simply lowering the demand for clocks and raising the demand for books. As a result, price goes down for clocks and up for books. Sellers see these price changes and respond to them. They decrease the quantity supplied of clocks and increase the quantity supplied of books. Price, then, acts as a signal that is passed along by buyers to sellers. As price goes down, buyers are saying to sellers “produce less of this good.” As price goes up, buyers are saying to sellers “produce more of this good.” In this example, price is a signal that directs the allocation of resources away from clocks and toward books...
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This document was uploaded on 01/16/2014.

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