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Demand
In a market economy, the price of a good is determined by the interaction of demand and supply.
Demand
Demand is the relationship between the price of a good and the quantity of the good demanded at each price. The various combinations of price and
quantity demanded can be reported in a demand schedule.
Each individual in a market has a demand schedule since each person has different preference over the products.
Demand
The law of demand: The greater the price the lower the quantity demanded, other things being equal.
Demand
Market Demand: the total quantity demanded in the market equals the sum of the quantities demanded by each person in the market at a given price.
The law of demand also holds for market demand.
Demand
Demand schedules in the Market for Chewing Gum
PriceQuantity Demanded by Total
Quantity Demanded
Person 1 Person 2 Person 3 Person 4
$0.01 10 17 13 20 60
$0.10 7 16 10 17 50
$0.20 5 15 5 15 40
$0.30 4 8 4 14 30
$0.40 2 6 3 9 20
$0.50 1 3 1 5 10
Supply
Supply is the relationship between the price of a good and the quantity supplied by producers.
A market supply is found by adding up individual producer supply schedules. Summing the quantity supplied at each price by each producer (horizontal summing of the individual supply curves) derives the market supply curve.
Supply
The law of supply: The higher the price of a good, the greater the quantity supplied, other things being equal.
The law of supply is the result of the law of increasing cost.
Supply
Supply Schedules in the Market for Chewing Gum
PriceQuantity Supplied by Total
Quantity Supplied
Firm 1 Firm 2 Firm 3
$0.01 10 15 0 25
$0.10 20 25 5 50
$0.20 30 35 10 75
$0.30 40 45 15 100
$0.40 50 55 20 125
$0.50 60 65 25 150
Supply
A change in supply indicates a shift of the supply curve.
A change in the quantity supplied is represented by the movement long the supply curve, when there is a change of the own price.
Supply
Determinants of Supply (other than own price) The prices of factors of production The price of related goods: substitutes and
complements in the production process. Expected future prices Number of suppliers Technology Taxes and subsidies The state of nature
Demand and Supply
Market Equilibrium In the supply and demand model,
the equilibrium occurs when there is neither a shortage nor a surplus in the market.
Demand and Supply
Equilibrium Price is the price at which the quantity demanded equals the quantity supplied.
Equilibrium Quantity is the quantity bought and sold at the equilibrium price.
Demand and Supply
Changes in demand and Supply does not change Increase in demand leads to a rise in the
equilibrium price and quantity. Decrease in demand leads to a fall in
the equilibrium price and quantity.
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