All consumer behavior is represented by demand demand

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good or service at every given price. All consumer behavior is represented by demand. Demand is the solution to a consumer’s utility maximization problem. In the utility maximization problem, the consumer is able to choose the quantity. Everything else that is relevant to the consumer’s decision to consume is out of her control. In other words, the consumer has control over certain amount of income and observes a certain set of prices for the things she wishes to buy. Given those constraints, the consumer chooses to buy a quantity of each good and service that maximizes her utility. A consumer’s demand tells us what she will buy. Demand is determined by price of the product, income available, accumulated wealth, prices of related products, tastes and preferences, and expectations. Demand for a good or service can be defined for an individual household , or for a group of households that make up a market . Market demand is the sum of all the quantities of a good or service demanded per period by all the households buying in the market for that good or service. The Law of Demand states that as the price of a good increases, the quantity that a utility maximizing consumer will purchase will go down, holding all else that is important constant. We can graphically represent a demand curve. The demand curve (D) will be a downward sloping curve on a graph that has relative price per unit (P) on the vertical axis and the quantity per time-period (Q) on the horizontal axis. 2
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ISS 225 – Power, Authority, Exchange Economic Order The demand curve is the solution to the profit-maximizing problem. Given price, if a consumer chooses a quantity that is off her demand curve, she can do better by altering her consumption choice. 2. Supply Supply is the willingness and ability of producers or a group of producers to produce a good or service at every given price. All selling behavior is represented by supply. Supply is the solution to the firm’s profit maximization problem. Everything else that is relevant to the firm’s decision to produce is out of its control. In other words, the firm has access to technology and resources and is able to sell its output at a given price. Given those constraints, the firm chooses to produce/sell a quantity that maximizes its profits. A firm’s supply tells us what it will produce. Factors determining a firm’s supply would include the price of the product, the cost of producing the product, and the prices of related products. The supply of a good or service can be defined for an individual firm, or for a group of firms that make up a market or an industry. 3. Market Equilibrium The operation of the market depends on the interaction between suppliers and demanders. Market Equilibrium is the condition that exists when quantity supplied is equal to quantity demanded.
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