96 chapter 4 labor and financial markets this

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96Chapter 4 | Labor and Financial MarketsThis OpenStax book is available for free at
Why are demand and supply curves important?The demand and supply model is the second fundamental diagram for this course. (The opportunity set modelintroduced in theChoice in a World of Scarcitychapter was the first.) Just as it would be foolish to try to learnthe arithmetic of long division by memorizing every possible combination of numbers that can be divided byeach other, it would be foolish to try to memorize every specific example of demand and supply in this chapter,this textbook, or this course. Demand and supply is not primarily a list of examples; it is a model to analyzeprices and quantities. Even though demand and supply diagrams have many labels, they are fundamentallythe same in their logic. Your goal should be to understand the underlying model so you can use it to analyzeanymarket.Figure 4.9displays a generic demand and supply curve. The horizontal axis shows the different measures ofquantity: a quantity of a good or service, or a quantity of labor for a given job, or a quantity of financial capital.The vertical axis shows a measure of price: the price of a good or service, the wage in the labor market, orthe rate of return (like the interest rate) in the financial market.The demand and supply model can explain the existing levels of prices, wages, and rates of return. To carryout such an analysis, think about the quantity that will be demanded at each price and the quantity that willbe supplied at each price—that is, think about the shape of the demand and supply curves—and how theseforces will combine to produce equilibrium.Demand and supply can also be used to explain how economic events will cause changes in prices, wages,and rates of return. There are only four possibilities: the change in any single event may cause the demandcurve to shift right or to shift left; or it may cause the supply curve to shift right or to shift left. The key toanalyzing the effect of an economic event on equilibrium prices and quantities is to determine which of thesefour possibilities occurred. The way to do this correctly is to think back to the list of factors that shift thedemand and supply curves. Note that if more than one variable is changing at the same time, the overallimpact will depend on the degree of the shifts; when there are multiple variables, economists isolate eachchange and analyze it independently.Figure 4.9 Demand and Supply CurvesThe figure displays a generic demand and supply curve. Thehorizontal axis shows the different measures of quantity: a quantity of a good or service, a quantity of laborfor a given job, or a quantity of financial capital. The vertical axis shows a measure of price: the price of agood or service, the wage in the labor market, or the rate of return (like the interest rate) in the financialmarket. The demand and supply curves can be used to explain how economic events will cause changes inprices, wages, and rates of return.

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