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in
competitive
markets
many buyers many sellers no single buyer or seller can affect the price
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money relative
price price
what we pay for something what something is worth in terms of another product
eg. bananas cost 50 each while chocolate bars cost $1.00
one banana costs half a chocolate bar one chocolate bar costs two bananas
relative
quantity
demanded
schedule curve
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table setting out price and quantity demanded graphical portrayal of the demand relationship
Law
of Demand
demand
tastes
and preferences
consumer
incomes
inferior goods goods people consume because they cant afford better products
if consumer incomes increase, demand decreases if consumer incomes decrease, demand increases
prices
of related goods
population
if the population of a market area increases, demand increases if the population of a market area decreases, demand decreases
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expected
future prices
if the expected future price is higher, demand increases now if the expected future price is lower, demand decreases now
expected
future incomes
if consumers expect their incomes to increase, demand increases now if consumers expect their incomes to decrease, demand decreases now
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changes in the goods own price causes a movement along the curve
change in quantity demanded Figure 3.3, p. 61
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quantity
supplied
schedule curve
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table setting out price and quantity supplied graphical portrayal of the supply relationship
Law
of Supply
the higher the price consumers are willing to pay, the more producers are willing to supply, ceteris paribus
marginal cost of production increases as production increases, so producers need a higher price to keep producing
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input
prices
technology
number
if the number of firms in the industry increases, supply increases if the number of firms in the industry decreases, supply decreases
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prices
if the price of a substitute decreases, the firm produces less of it and more of the other
supply of the other increases
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prices
if the price of a complement in production decreases, the firm produces less of it and of the other
supply of the other decreases
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expected
future prices
if suppliers think the future price of their product is lower, they will sell more of it now
supply increases now
if suppliers think the future price of their product is higher, they will hold back production to sell later
supply decreases now
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the
state of nature
if the weather is good, crops will be plentiful, supply of agricultural products will increase an earthquake that destroys factories interferes with production, supply of those products will decrease
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changes
changes
when
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equilibrium
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P*
is a market-clearing price
at P*, every consumer who wishes to purchase the product at that price can do so every supplier who wishes to sell the product at that price can do so
price
is an equilibrator
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when
not enough consumers want to purchase the product suppliers send too much to the market there will be pressure on the price to fall
when
consumers wish to purchase a lot of this product suppliers are not willing to supply enough at that low price there will be pressure on the price to rise
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equilibrium price and quantity both increase equilibrium price and quantity both decrease equilibrium price decreases but quantity increases
decrease
in supply
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increase
27
increase
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demand increases supply increases net effect demand increases supply decreases net effect
P Q P Q P? Q
demand decreases supply increases net effect demand decreases supply decreases net effect
P Q P Q P Q? P Q P Q P? Q
P Q P Q P Q?
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