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Goal 8
Supply and Demand
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The Law of Demand The law of demand holds that all other
things equal, as the price of a good or service increases, the quantity demanded will decrease. The opposite is also true. As the price of a good
or service decreases, the quantity demanded will increase
TRANSLATION: THE MORE EXPENSIVE SOMETHING IS, THE LESS
PEOPLE WILL WANT TO BUY IT…DUH!!!!!!
CONSUMERS HAVE A “PRICE MOTIVE”
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Demand Curve
The demand curve has a negative slope, consistent with the law of demand.
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The Law of Supply The law of supply Holds that all other
things equal, as the price of a good or service increases, the quantity supplied will increase and vice versa.
TRANSLATION: IF PEOPLE ARE WILLING TO PAY A HIGH PRICE FOR AN
ITEM, PRODUCERS ARE GOING TO MAKE MORE OF THAT ITEM TO INCREASE PROFIT.
SUPPLIERS HAVE A “PROFIT MOTIVE”
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Supply Curve
The supply curve has a positive slope, consistent with the law of supply.
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Equilibrium a.k.a Equal-ibrium In economics, an equilibrium is a situation
in which: No inherent tendency to change quantity demanded equals quantity supplied,
and the market just clears. It is where the supply curve intersects the
demand curve
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Equilibrium
Equilibrium occurs at a price of $3 and a quantity of 30 units.
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Bradley Nomination Market (6/99-9/99)
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Shortages and Surpluses A shortage occurs when quantity
demanded exceeds quantity supplied. A shortage implies the market price is too low.
A surplus occurs when quantity supplied exceeds quantity demanded. A surplus implies the market price is too high.
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Market adjustment to surplus
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Market adjustment to shortage
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Shift in the Demand Curve A change in any variable other than price
that influences quantity demanded produces a shift in the demand curve or a change in demand.
Factors that shift the demand curve include: Change in consumer incomes Population change Consumer preferences Prices of related goods:
Substitutes: goods consumed in place of one another Complements: goods consumed jointly
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Shift in the Demand Curve
This demand curve has shifted to the right. Quantity demanded is now higher at any given price.
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Shift in the Supply Curve Things other than price that influence
quantity supplied produces a shift in the supply curve or a change in supply.
Factors that shift the supply curve include: Change in input costs
Things that go into making the product (Factors of production)
Increase in technology Assembly line, Innovations, Inventions
Change in size of the industry More/less people that are actually making the
product
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Shift in the Supply Curve
For an given rental price, quantity supplied is now lower than before.
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Equilibrium After a Supply Shift
The shift in the supply curve moves the market equilibrium from point A to point B, resulting in a higher price and lower quantity.
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Price Ceilings & Floors A price ceiling is a legal maximum that can be charged
for a good. Results in a shortage of a product Common examples include apartment rentals and credit cards
interest rates.
A price floor is a legal minimum that can be charged for a good. Results in a surplus of a product Common examples include soybeans, milk, minimum wage
**you can not go above the ceiling or below the floor**
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Price Ceiling
A price ceiling is set at $2 resulting in a shortage of 20 units.
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Price Floor
A price floor is set at $4 resulting in a surplus of 20 units.