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CHAPTER 4
Teach a parrot the terms supply and demand and youve got an economist.
Thomas Carlyle
McGraw-Hill/Irwin
Demand
The law of demand states that the quantity of a good demanded is inversely related to the goods price In other words, other things equal, Quantity demanded rises as price falls Quantity demanded falls as price rises As prices change, people change how much theyre willing to buy
The law of demand is based on the fact that when prices for a good rise, people substitute away from that good to other goods
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A demand curve is the graphic representation of the relationship between price and quantity demanded
The demand curve is downward sloping
P1 P0 Demand Q1 Q0 Q
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Shift in demand
$1
A Demand0 Demand1 Q
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150
200
3. Tastes
4. Expectations 5. Taxes and subsidies to consumers
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E D C B
2 4 6 8
A
Demand for DVDs
9 8 6 4 2
B C D
A
10
E
Q
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10
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Supply
The law of supply states that the quantity of a good supplied is directly related to the goods price In other words, other things equal, Quantity supplied rises as price rises Quantity supplied falls as price falls The law of supply occurs because: When prices rise, firms substitute production of one good for another Assuming firms costs are constant, a higher price means higher profit
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A supply curve is the graphic representation of the relationship between price and quantity supplied
Supply
P1 P0
The supply curve is upward sloping As price increases, quantity supplied increases
Q0
Q1
Q
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Shift in Supply
S0
S1
Q
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The market supply curve is the summation of all individual supply curves
10
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14 15
Q
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Equilibrium price is the price toward which the invisible hand drives the market
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Supply
P1 P* P0
Excess demand
Demand Q
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