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Demand, Supply, and Price: Economics
Demand, Supply, and Price: Economics
ECONOMICS
ELEVENTH EDITION
Chapter 3
DEMAND, SUPPLY, AND PRICE
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Learning Outcomes
The participants in markets and what motivates them The main factors that influence how much of a product consumers wish to buy The main influences on how much producers wish to sell How consumers and producers interact to determine the market price While demand and supply forces are present in all markets, many different institutional structures also affect market outcomes
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DEMAND
Alices Demand Schedule
Reference Letter
a b c d e f
c
1.50
b
1.00 0.50
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The table shows the quantity of eggs that Alice will demand at each selected price, other things being equal. For example, at a price of 1.00, Alice demands 5 dozen eggs per month. The data is plotted in Figure Alices demand curve.
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Each point on the figure relates to a row on Table Demand Schedule. For example, when price is 3.00, 1 dozen are brought per month (point f ). When the price is 0.50, 7 dozen are brought (point a). The resulting curve relates the price of a commodity to the amount that Alice wishes to purchase.
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1.00
3.00 2 4 6 8 2.00 1.00 3.00 2.00 2 4 6 8 10 12 14
Quantity of Eggs [dozen per month]
[i]. William
1.00
[ii]. Sarah
3- 7
The figure illustrates aggregation over two individuals, William and Sarah. For example, at a price of 2.00 per dozen William purchases 2.4 dozen and Sarah purchases 3.6 dozen. Together they purchase 6 dozen. In general the market demand curve is the horizontal sum of the demand curves of all consumers in the market.
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Reference Letter a b c d e
Quantity demanded [000 dozen per month] 110.0 90.0 77.5 67.5 62.5
3.00
60.0
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The table shows the quantity of eggs that would be demanded by all consumers at selected prices, ceteris paribus. For example, row W indicates that if the price of eggs were 1.50 per dozen, consumers would want to purchase 77,500 dozen per month. The data in this table are plotted in the following figure.
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2.50
2.00
X W
1.50
V
1.00
0.50
20
40
60
80
100
120
140
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The negative slope of the curve indicates that quantity demanded increases as price falls. The six points correspond to the six pricequantity combinations shown in the Table. The curve drawn through all of the points and labelled Dis the demand curve.
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2.00
1.50 1.00
W
V U
0.50
20
40
60
80
100
120
140
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2.00
1.50 1.00
W
V
W V U
0.50
20
40
60
80
100
120
140
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When the curve shifts from D0 to D1, more is demanded at each price and a higher price is paid for each quantity. At price 1.50, quantity demanded rises from 77.5 thousand dozen (point W) to 100 (point W). The quantity of 90 thousand dozen, which was formerly bought at a price of 1.00 (point V), will be brought at a price 2.00 after the shift (point X).
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Price 0
Quantity
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Price 0
Quantity
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Price 0
Quantity
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Reference Letter
Quantity demanded [000 dozen per month] 5.0 46.0 77.5 100.0 115.0 122.5
u v w x y
3.00
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The table shows the quantities that producers wish to sell at various prices, ceteris paribus. For example, row y indicates that if the price were 2.50, producers would wish to sell 115,000 dozen eggs per month. The data in this table are plotted in the following figure.
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3.00 Y
2.50 X
20
40
60
80
100
120
140
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The six points correspond to the price-quantity combinations shown in Table A Market Supply Schedule for Eggs. The curve drawn through these points, labeled S, is the supply curve showing the quantity of eggs that will be supplied at each price of eggs. The supply curves positive slope indicates that quantity supplied increases as price increases.
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u
v w x y z
0.50
1.00 1.50 2.00 2.50 3.00
5.0
46.0 77.5 100.0 115.0 122.5
28.0
76.0 102.0 120.0 132.0 140.0
U
V W X Y Z
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S0
2.00
20
40
60
80
100
120
140
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S0
S1
2.00
20
40
60
80
100
120
140
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The rightward shift in the supply curve from S0 to S1 indicates an increase in the quantity supplied at each price. For example, at the price of 1.00 the quantity supplied rises from 46 to 76 thousand dozen per month.
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Quantity
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Quantity
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Quantity
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Quantity
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Quantity demanded [000 dozen per month] 110.0 90.0 77.5 67.5 62.5
Excess Demand [quantity demanded minus quantity supplied] [000 dozen per month] 105.0 44.0 0.0 -32.5 -52.5
3.00
60.0
122.5
-62.5
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Equilibrium occurs where the quantity demanded and the quantity supplied are equal. In the table the equilibrium price is 1.50. The equilibrium quantity bought and sold is 77.5 thousand dozen per month. For prices below the equilibrium, such as 0.50, quantity demanded (110) exceeds quantity supplied (5). For prices above the equilibrium, such as 3.00, quantity demanded (60) is less than quantity supplied (122.5). The data in this table are plotted in the following figure.
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2.50
2.00
1.50
1.00
W
V U
0.50
20
40
60
80
100
120
140
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2.50
2.00
1.50
V 1.00 U 0.50
W
V U
20
40
60
80
100
120
140
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Equilibrium price is where the demand and supply curves intersect, point E in the figure. At all prices above equilibrium there is excess supply and downward pressure on price. At all prices below equilibrium there is excess demand and upward pressure on price.
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E0 p0 S D0
q0
Quantity
p0 E0
q0
Quantity
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E0 p0 D1 D0 S p1 E1
E1 p1 p0 E0
q0
q1
Quantity
q0
q1
Quantity
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The original curves are D0 and S, which intersect to produce equilibrium at E0. Price is p0, and quantity q0. An increase in demand shifts the demand curve to D1. Price rises to p1 and quantity rises to q1 taking the new equilibrium to E1. A decrease in demand now shifts the demand curve to D0. Price falls to p0 and quantity falls to q0 taking the new equilibrium to E0. Thus, an increase in demand raises both price and quantity while a decrease in demand lowers both price and quantity.
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The original demand and supply curves are D and S0, which intersect to produce an equilibrium at E0, price p0 and quantity q0. An increase in supply shifts the supply curve to S1. Price falls to p1 and quantity rises to q1, taking the new equilibrium to E1. A decrease in supply shifts the supply curve back to S0. Price rises to p0 and quantity falls to q0 taking the new equilibrium to E0. Thus an increase in supply raises quantity but lowers prices while a decrease in supply lowers quantity but raises price.
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The decision-taking units in economic theory are called agents. They are [a] individuals, for the demand in goods markets and for supply in factor markets; [b] firms, for supply in goods markets and demand in factor markets; and [c] governments, for supply of some goods and for regulation and control of the private sector [see Chapter 5]. Given the resources at their command, each individual is assumed to maximize his or her satisfaction, and each firm is assumed to maximize its profit.
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Demand
An individual consumers demand curve shows the relation between the price of a product and the quantity of that product the customer wishes to purchase per period of time. It is drawn on the assumption that all other prices, income, and tastes remain constant. Its negative slope indicates that the lower the price of the product, the more the consumer wishes to purchase. The market demand curve is the horizontal sum of all the individual consumers.
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CHAPTER 3: DEMAND, SUPPLY AND PRICE The demand curve for a normal good shifts to the right when the price of a substitute rises, when the price of a complement falls, when total income rises, when the distribution of income changes in favour of those with large demands for the product, and when tastes change in favour of the product It shifts to the left with the opposite changes. A movement along a demand curve indicates a change in quantity demanded in response to a change in the products own price; a shift in a demand curve indicates a change in the quantity demanded at each price in response to a change in one of the conditions held constant along a demand curve.
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Supply
The supply curve for a product shows the relationship between its price and the quantity that producers wish to produce and offer for sale per period of time. It is drawn on the assumption that all other forces that influence quantity supplied remain constant, and its positive slope indicates that the higher price, the more producers wish to sell.
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CHAPTER 3: DEMAND, SUPPLY AND PRICE Price theory is most simply developed in the context of a constant price level. Price changes discussed in the theory are changes relative to the average level of all prices. In an inflationary period, a rise in the relative price of one product means that its price rises by more than the rise in the general price level; a fall in its relative price means that its price rises by less than the rise in the general price level.
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CHAPTER 3: DEMAND, SUPPLY AND PRICE Individual markets, sectors, and the economy Markets are partially separated from each other because different products are sold in each, and because of barriers to the movement of products among such markets as transport costs [a natural barrier] and tariffs [ a policy-induced barrier]. For various types of study, data for individual markets are aggregated into sectors. Examples are primary, secondary, and tertiary, a distinction on the types of goods produced; private and public, a distinction depending on whether or not the costs of production are recovered by selling products to their users.