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7/23/2019 03 Econweb Sd
http://slidepdf.com/reader/full/03-econweb-sd 1/17
Chapter 3
Supply and Demand
7/23/2019 03 Econweb Sd
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The Law of Demand
• The law of demand holds that other things
equal, as the price of a good or service rises, its
quantity demanded falls. – The reverse is also true as the price of a good or
service falls, its quantity demanded increases.
7/23/2019 03 Econweb Sd
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Demand Curve
The demand curve has a negative slope, consistent "ith
the la" of demand.
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The Law of Supply
• The law of supply holds that other things equal,
as the price of a good rises, its quantity
supplied "ill rise, and vice versa.• $hy do producers produce more output "hen
prices rise%
– They see& higher profits – They can cover higher marginal costs of production
7/23/2019 03 Econweb Sd
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Supply Curve
The supply curve has a positive slope, consistent "ith
the la" of supply.
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Equilibrium
• )n economics, an equilibrium is a situation in
"hich
– there is no inherent tendency to change, – quantity demanded equals quantity supplied, and
– the mar&et *ust clears.
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Equilibrium
quili-rium occurs at a price of ! and a quantity of !/
units.
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Shortages and Surpluses
• shortage occurs "hen quantity demanded
exceeds quantity supplied.
– shortage implies the mar&et price is too lo".• surplus occurs "hen quantity supplied
exceeds quantity demanded.
– surplus implies the mar&et price is too high.
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Shift in the Demand Curve
• change in any varia-le other than price thatinfluences quantity demanded produces a shift in
the demand curve or a change in demand.• 3actors that shift the demand curve include – 4hange in consumer incomes
– 5opulation change
– 4onsumer preferences
– 5rices of related goods• 6u-stitutes goods consumed in place of one another
• 4omplements goods consumed *ointly
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Shift in the Demand Curve
This demand curve has shifted to the right. 7uantity
demanded is no" higher at any given price.
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Equilibrium After a Demand Shift
The shift in the demand curve moves the mar&et
equili-rium from point to point 8, resulting in a higher
price and higher quantity.
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Shift in the Supply Curve
• change in any varia-le other than price that
influences quantity supplied produces a shift in
the supply curve or a change in supply.• 3actors that shift the supply curve include
– 4hange in input costs
– )ncrease in technology
– 4hange in si9e of the industry
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Shift in the Supply Curve
3or an given rental price, quantity supplied is no" lo"er
than -efore.
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Equilibrium After a Supply Shift
The shift in the supply curve moves the mar&et equili-rium from
point to point 8, resulting in a higher price and lo"er quantity.
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Prie Ceilings ! "loors
• price ceiling is a legal maximum that can -echarged for a good. – :esults in a shortage of a product
– 4ommon examples include apartment rentals andcredit cards interest rates.
• price floor is a legal minimum that can -e
charged for a good. – :esults in a surplus of a product
– 4ommon examples include soy-eans, mil&,minimum "age
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Prie Ceiling
price ceiling is set at 2 resulting in a shortage of 2/
units.
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Prie "loor
price floor is set at # resulting in a surplus of 2/
units.