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Demand/Supply Curves and Elasticity
Mucho Importante in Economics…the basis of it all!!!!(pgs 57-68, Krugman)
12.1 Students understand common economic terms and concepts and economic reasoning.
12.2 Students analyze the elements of America's market economy in a global setting.
Supply and Demand in a Competitive Market Competitive Market: Market with many buyers and
sellers of the same good or service No individual has any influence
Supply and Demand Model Physically shows market behavior Key elements in Supply and Demand Model
The demand curve The supply curve Factors that cause curve to shift (“shifters”) Equilibrium Price Changes in Equilibrium price when demand or supply
shift
Supply and Demand Model
The Demand Curve
The higher the price, the fewer people who want to buy the good or service
The lower the price, the more people who want to buy the good or service
Demand Schedule: table that shows how much of good or service consumers will buy at different prices
The Demand Curve Model
Plot the Demand Schedule Vertical Axis is always price Horizontal is always quantity demanded
Law of Demand Curve slops downward: reflects the principle that a higher price
reduces the number of people willing to buy a good or service…”able and willing”
Exceptions Giffen Good (with increase in price, demand would not fall)
Primarily seen with the poor – potatoes and rice
Veblen Good (demand stays the same or more as prices go up)
“Snob effect”
Shifts in the Demand Curve
Different factors affect shifts in the quantity demanded Graph curve shifts right or left depended on
the effect of the factor Difference btw “movements along the curve”
vs “shifts” Decrease in demand = left Increase in demand = right
Factors that Contribute to a Demand Shift Changes in the price of related goods
Substitutes (purchase instead, alternate) Complements (goods consumed together)
Changes in income “normal” goods vs “inferior” goods (cars vs. busses)
Changes in tastes Preferences (fads, fashion)
Changes in expectations Sales after Christmas
Demand curve relies on “all things being equal”
The Supply Schedule
Higher the price offered, the more willing to sell…”quantity supplied”
Supply Schedule
Supply Curve
How much of a good or service people are willing to sell at any given price
Supply “Shifters”
Change in the quantity supplied at any given price Movements along the supply: change in the quantity supplied of a good
that is the result of a change in that good’s price
Shifts of the supply curve: change in input prices, technology, expectations
Supply, Demand, and Equilibrium
Determines the price of a good or service markets move toward equilibrium
When the price has moved to a level at which the quantity demanded equals the quantity supplied
Equilibrium price or market clearing price: every buyer willing to pay that price finds a seller willing to sell at that price
Shortages and surpluses?
Role of Prices in a Mixed Economy (the United States for instance) Prices provide incentive for firms and workers
to produce Prices give markets flexibility to respond to
changing conditions Prices guide scare resources to their most
efficient uses
Government Intervention in Markets
Price controls when too high for consumers or too low for producers Price floor: Prevents prices from going too
low, ex. minimum wage
Price ceiling: Prevents prices from going to high, ex. rent control
Rationing and the Black Market
Rationing: controlled distribution of a limited supply of a good or service
Black Markets: goods are traded at prices or in quantities higher than allowed by law.
Supply/Demand and Markets Vocabulary Competitive market Demand Schedule Supply Schedule Demand Curve Supply Curve “Shifters” (both Demand and Supply) Equilibrium Shortages and Surpluses Mixed economy Price ceiling Price floor Rationing Black Market