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Chapter Three
Market demand
Demand for a good or service is defined as quantities that people are ready (willing and able) to buy at various prices within some given time period
Other factors besides price are held constant
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Market demand
Market demand is the sum of all the individual demands Example: demand for pizza
Chapter Three
Market demand
The inverse relationship between price and the quantity demanded of a good or service is called the Law of Demand
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Market demand
Changes in price result in changes in the quantity demanded This is shown as movement along the demand curve Changes in non-price factors result in changes in demand This is shown as a shift in the demand curve
Copyright 2009 Pearson Education, Inc. Publishing as Prentice Hall. 5
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Market demand
Nonprice determinants of demand tastes and preferences income prices of related products future expectations number of buyers
Chapter Three
Market supply
The supply of a good or service is defined as quantities that people are ready to sell at various prices within some given time period
Other factors besides price held constant
Chapter Three
Market supply
Changes in price result in changes in the quantity supplied shown as movement along the supply curve Changes in non-price determinants result in changes in supply shown as a shift in the supply curve
Chapter Three
Market supply
Nonprice determinants of supply costs and technology prices of other goods or services offered by the seller future expectations number of sellers weather conditions
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Market equilibrium
Equilibrium price: the price that equates the quantity demanded with the quantity supplied
Equilibrium quantity: the amount that people are willing to buy and sellers are willing to offer at the equilibrium price level
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Chapter Three
Market equilibrium
Shortage: a market situation in which the quantity demanded exceeds the quantity supplied shortage occurs at a price below the equilibrium level Surplus: a market situation in which the quantity supplied exceeds the quantity demanded surplus occurs at a price above the equilibrium level
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Market equilibrium
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Comparative statics is a form of sensitivity (or what-if) analysis Commonly used method in economic analysis
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Process of comparative statics analysis: state all the assumptions needed to construct the model begin by assuming that the model is in equilibrium introduce a change in the model, so a condition of disequilibrium is created find the new point of equilibrium compare the new equilibrium point with the original one
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sellers already in the market respond to a change in equilibrium price by adjusting variable inputs buyers already in the market respond to changes in equilibrium price by adjusting the quantity demanded for the good or service
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Short run changes show the rationing function of price The rationing function of price is the change in market price to eliminate the imbalance between quantities supplied and demanded is the change in market price to eliminate the imbalance between quantities supplied and demanded
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Short-run analysis
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Short-run analysis
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Short-run analysis
an increase in supply causes equilibrium price to fall and equilibrium quantity to rise
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Short-run analysis
a decrease in supply causes equilibrium price to rise and equilibrium quantity to fall
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The long run is the period of time in which: new sellers may enter a market existing sellers may exit from a market existing sellers may adjust fixed factors of production buyers may react to a change in equilibrium price by changing their tastes and preferences
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Long run changes show the allocating function of price The guiding or allocating function of price is the movement of resources into or out of markets in response to a change in the equilibrium price
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Long-run analysis
initial change: decrease in demand from D1 to D2 result: reduction in equilibrium price and quantity (to P2,Q2) follow-on adjustment: movement of resources out of the market leftward shift in the supply curve to S2
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Long-run analysis
initial change: increase in demand from D1 to D2 result: increase in equilibrium price and quantity (to P2,Q2) follow-on adjustment: movement of resources into the market rightward shift in the supply curve to S2
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in the extreme case, the forces of supply and demand are the sole determinants of the market price, not any single firm this type of market is perfect competition in many cases, individual firms can exert market power over price because of their: dominant size ability to differentiate their product through advertising, brand name, features, or services
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Example: coffee
buy low, sell high 2000: overproduction led to price falls 2004: prices moved up again Starbucks effects
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Example: air travel buy high, sell low industry deregulated in late 1970s tight competition post 9/11, a low-cost structure is needed
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Global application
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