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7/31/2019 Demand Chapter 2 Finals
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Chapter 2
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Buyers or Consumers are sometimescalled demanders.
Consumers are said to demandproducts in the market place.Demandrefers to the consumption
behavior of buyers in the market.
Demandalso means the willingness topay of consumers at various prices andquantities.
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Prices are the tools by
which the market
coordinates individualdesires.
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Quantity demanded rises as price falls,other things held constant (such asincome or the prices of competitiveproducts).Quantity demanded falls as prices rise,
other things constant.
Therefore, there is an inverse ornegative relationship between price andquantity demanded.
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What accounts for the law of demand?
People tend to substitute for goodswhose price has gone up
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The demand curve is the graphicrepresentation of the law of demand.
The demand curve slopes downward
and to the right.
As the price goes up, the quantity
demanded goes down.
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The slope tells us that quantity demanded variesindirectlyin the opposite directionwith price.
The slope of the demand curve is negative
because the relationship between price andquantity is inverse.
A simple equation of demand in slope-interceptform is
Qd = a - mP
Slope is negative
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Other things constant means that all
other factors that affect the analysis
are assumed to remain constant,whether they actually remain constant
or not.
These factors may include changingtastes, prices of other goods, the
income of the buyers, even the
weather.
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D
Price
(perun
it)
0
Quantity demanded (per unit of time)
PA
QA
A
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Demand refers to a schedule ofquantities of a good that will be
bought per unit of time at various
prices, other things constant.
Graphically, demand refers to
the entire demand curve.
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Graphically, it refers to a specificpointon the demand curve.
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A movement along ademand curve is thegraphical representation of
the effect of a change inprice on the quantitydemanded.
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A shift in demand is the graphical
representation of the effect ofanything other than price on demand.
The original curve will move tothe right or to the left.
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0
D1
Change in quantity demanded(a movement along the curve)
B
Price
(peru
nit)
Quantity demanded (per unit of time)100
$2
$1
200
A
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D0
Price
(peru
nit)
Quantity demanded (per unit of time)100
$2
$1
200
A
D1
Change in demand(a shift of the curve in this
case a decrease in demand)
250
B
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Shift factors of demand
are those that cause shifts
in the demand curve tothe right or left.
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Shift factors of demand includebut are not
limitedto the following:
Society's income The prices of other goods
Tastes
Expectations
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A rise in income will increase demand
for goods.
When the prices of substitutegoods fall, you will consume less ofthe good whose price has not
changed. A change in taste will change
demand with no change in price.
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If you expect your income torise, you may consume more
now.
If you expect prices to fall inthe future, you may put offpurchases today.
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The demand table assumes all the following:
As price rises, quantity demanded
declines.
Quantity demanded has a specific timedimension to it.
All the products involved are identical in
shape, size, quality, etc.
The schedule assumes that everything
else is held constant.
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Plot each point in the demand table ona graph and connect the points toderive the demand curve.
The demand curve graphically conveysthe same information that is on thedemand table.
The curve represents the maximumprice that you will for various quantitiesof a goodyou will happily pay less.
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Price
percassett
e
(in
do
llars)
A Demand
Curve
Quantity of cassettes demanded(per week)
1 2 3 4 5 6 7 8 9101112
13
$6.00
5.00
4.00
3.00
2.00
1.00.50
0
3.50
E
D
C
BFA
Price per
cassette
A
B
C
D
E
A Demand Table
Cassette
rentalsdemandedper week
$0.50
1.00
2.003.004.00
9
8
6
4
2
Demandfor
cassettes
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A market demand curve is the
horizontal sum of all individual
demand curves.The market demand curve is
determined by adding the
individual demand curves of allthe demanders.
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Real world sellers do not add upindividual demand curves.
They estimate total marketdemand for their product whichbecomes smooth and downwardsloping curve.
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The demand curve is downward sloping for
the following reasons:
At lower prices, existingdemanders buy more.
At lower prices, newdemanders enter the market.
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(1)Price percassette
$.0.501.001.502.002.503.003.504.00
(2)Alicesdemand
(3)Brucesdemand
(2)Cathysdemand
(3)Marketdemand
98765432
65432100
11000000
16141197532
ABCDEFGH
Quantity of cassettes demanded per w
2
Cathy BruceAlice
D
A
C
E
F
G
$4.003.50
3.002.50
2.00
1.50
1.00
0.50
0Pricep
ercassette
(ind
ollars)
4 6 8 10 12 14 16
B
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Individuals control the factors of
production.
Factors of production are theresources or inputs, necessary toproduce goods or services.
Individuals supply factors ofproduction to intermediaries or
firms.
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The analysis of the supply of produced goods
has two parts:
An analysis of the supply of thefactors of production to firms.
An analysis of why firms transform
those factors of production intofinal goods and services.
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Quantity supplied rises as price rises, other
things constant.
Quantity supplied falls as price falls, other
things constant.Thus, there is a direct orpositive
relationship between price and quantity
supplied.
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The law of supply is accounted for by two factors:
When prices of their product rise,firms arrange their activities to supplymore of the good to the market,substituting production of that goodfor the production of other goods.
Assuming firms' costs are constant, a
higher price means higher profits. Or, assuming firms costs rise as
production increases, they must raiseprice to cover their cost increase.
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The supply curve is the graphic representationof the law of supply.
The supply curve slopes upward to the right.The slope tells us that the quantity supplied
varies directlyin the same directionwith theprice.
A simple equation of supple isQs = a + mP
Slope is positive
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Quantity supplied (per unit of time)
0
S
A
Price
(per
unit)
PA
QA
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Supply refers to a schedule ofquantities a seller is willing tosell per unit of time at various
prices, other things constant.
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If the amount supplied is affected by anythingother than a change in price, there will be ashift in supply.
Shift in supply -- the graphicrepresentation of the effect of achange in a factor other than priceon supply.
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Quantity supplied refers to aspecific amount that will be
supplied at a specific price.
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Changes in price causes changes inquantity supplied represented by a
movement along a supply curve.
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Price
(perunit)
Quantity supplied (per unit of time)
S0
Shift in Supply(a shift of the curve in this case an
increase in supply)
S1
$15A B
1,250 1,500
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Change in quantitysupplied (a movementalong the curve)
Price
(perunit)
Quantity supplied (per unit of time)
S0
$15A
1,250 1,500
B
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Shift factors of supply are those
factors that cause shifts in the entire
supply curve to the left or right.
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The following are shift factors of supply:
Changes in the prices of inputs used in
the production of a good Changes in technology
Changes in suppliers' expectations
Changes in taxes and subsidies
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Changes in the prices of inputs used in the
production of a good.
If costs go up, then profits go down,and the incentive to supply also goesdown.
If costs go up substantially, the firmmay even shut down.
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Technology makes costs go down, profits go up,
thus the incentive to supply also goes up.
This is especially true when technologyreplaces labor.
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If they expect prices to rise in the future,
suppliers may store today's production for an
expected windfall later.
If they expect prices to fall in thefuture, suppliers may sell off more
of their inventories today.
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If taxes go up, costs also go up, and profits go
down, leading suppliers to reduce output.
If government subsidies go up,costs go down, and profits go up,
leading suppliers to increaseoutput.
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To derive a supply curve from a supplytable, you plot each point in the supplytable on a graph and connect the
points.The supply curve represents the set of
minimum prices an individual seller
will accept for various quantities of agood.Competing suppliers entry into the
market places a limit on the price any
supplier can charge.
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Competing suppliers entry intothe market places a limit on the
price any supplier can charge.
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The market supply curve isderived by horizontally adding
the individual supply curves of
each supplier.
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QuantitiesSupplied
AB
C
D
E
FG
H
I
(1)
Price(in dollars)
(2)
Ann'sSupply
(5)
MarketSupply
(4)
Charlie'sSupply
$0.000.501.001.502.00
2.503.003.504.00
01
2
3
4
56
7
8
00
1
2
3
45
5
5
00
0
0
0
00
2
2
01
3
5
7
911
14
15
(3)
Barry'sSupply
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1 2 3 4 5 6 7 8 9 10 11 12 13 14 15 16
Price
percassette(in
dollars)
Charlie Barry Ann
Quantity of cassettes supplied (per week)
$4.00
3.50
3.002.50
2.00
1.50
1.000.50
0
I
H
GF
E
D
CB
A
Market Supply
CA
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Supply and demand come
together to determineequilibrium quantity and
equilibrium price.
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Excess supply prices tend to fall if
quantity supplied is greater thanquantity demanded.
Excess demand prices tend to rise
if quantity demanded is greater thanquantity supplied.
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The larger the difference betweenquantity demanded and quantitysupplied, the greater the pressure for
prices to rise (if there is excessdemand) or fall (if there is excesssupply.
When quantity demanded equalsquantity supplied, prices have notendency to change.
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A
Price
percassette
(in
dollars) $5.00
4.00
3.50
3.00
2.50
2.00
1.50
1.00
S
D
Quantity of cassettes supplied and demanded(per week)
C
Excess demand
1 2 3 4 5 6 7 8 9 10 11 12
Excess supply
Excess supply
BE
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Equilibrium is a concept in which
opposing dynamic forces pushing
cancel each other out.
In supply and demand analysis,
equilibrium means that the
upward pressure on price is
exactly offset by the downward
pressure on price.
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Equilibrium price is the price towardwhich the invisible hand drives the
market. Equilibrium quantity is the amount
bought and sold at the equilibrium
price.
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A state of the worldit is acharacteristic of the staticmodel we use to examine the
world.Neither good or badbutsimply a state in whichdynamic pressures offset eachother.Equilibrium exists at a
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Consumer surplus the distance between
the demand curve and the price thedemander pays is net benefit to consumers.
Producer surplus if a producer receivesmore than the price he would be willing to
sell it for, he receives a net benefit
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What's good about equilibrium is
that it makes the combination ofconsumer and producer surplus as
large as it can be.
Markets allow trade, therebyleading to an increase in the
combination of consumer and
producer surplus.
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Price
Supply
Demand
Quantity
0
$1098
76543
21
10987654321
ProducerSurplus
Consumer Surplus
LostSurplus
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End of Chapter 2