Principal Economic 101 Assignment 3 Question 1:  a. A monopoly occurs when there are barriers entering the market. List 3 types of these barriers with exp

Principal Economic 101 Assignment 3 Question 1: 

a. A monopoly occurs when there are barriers entering the market. List 3 types of these barriers with explanation and example. (1 Mark)

b. Fill the following table for a monopolist firm. (1 Mark)

   

Marginal   revenue

Total   revenue

Output

Price

 

0

$100

 

1

$85

 

2

$70

 

3

$55

 

4

$40

 

5

$25

c.  Draw the demand curve and the marginal revenue curve for the above table. And explain the relationship between the marginal revenue and the price. (1 Mark) 

Question 2. 

a. Explain the effects of low price-guarantee on the price. (1 Mark)

b. Give reasons, when average cost increases as the total output increases for an increasing cost industry. (1 Mark) Survey of Economics: Principles,

Applications and Tools
Eighth Edition

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Survey of Economics: Principles,

Applications and Tools
Eighth Edition

Chapter 1

Introduction: What Is

Economics?

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Chapter Outline

1.1 What Is Economics?

1.2 The three economic questions: What, How and Who?

1.3 The Economic Way of Thinking

1.4 Microeconomics Verus Macroeconomics

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1.1 What Is Economics?

Economics: The study of choices when there is scarcity.

Scarcity: The resources we use to produce goods and

services are limited.

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Some Examples of Scarcity and Trade-

offs

• You have a limited amount of time. Each hour on the job

means one less hour for study or play.

• A city has a limited amount of land. If the city uses an acre

of land for a park, it has one less acre for housing, retailers,

or industry.

• You have limited income this year. If you spend $17 on a

music CD, that’s $17 less you have to spend on other

products or to save.

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The Five Factors of Production (1 of 2)

Factors of Production: The resources used to produce

goods and services; also known as production inputs or

resources.

Natural Resources: Resources provided by nature and

used to produce goods and services.

Labor: Human effort, including both physical and mental,

used to produce goods and services.

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The Five Factors of Production (2 of 2)

Physical Capital: The stock of equipment, machines,

structures, and infrastructure that is used to produce goods

and services.

Human Capital: The knowledge and skills acquired by a

worker through education and experience and used to

produce goods and services.

Entrepreneurship: The effort used to coordinate the factors

of production—natural resources, labor, physical capital, and

human capital—to produce and sell products.

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1.2 The Three Key Economic

Questions: What, How, and Who?

The choices made by individuals, firms, and governments

answer three questions:

1. What products do we produce?

2. How do we produce the products?

3. Who consumes the products?

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Economic Models

Economists use economic models to explore the choices

people make and the consequences of those choices.

Economic model: A simplified representation of an

economic environment, often employing a graph.

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Positive versus Normative Analysis

Most modern economics is based on positive analysis:

Positive Analysis: Answers the question “What is?” or

“What will be?”

A second type of economic reasoning is normative in

nature:

Normative Analysis: Answers the question “What ought

to be?”

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Table 1.1 Comparing Positive and

Normative Questions

Positive Questions Normative Questions

• If the government increases the

minimum wage, how many workers

will lose their jobs?

• Should the government

increase the minimum wage?

• If two office-supply firms merge, will

the price of office supplies increase?

• Should the government block

the merger of two office-supply

firms?

• How does a college education affect

a person’s productivity and earnings?

• Should the government

subsidize a college education?

• How do consumers respond to a cut

in income taxes?

• Should the government cut

taxes to stimulate the

economy?

• If a nation restricts shoe imports, who

benefits and who bears the cost?

• Should the government restrict

imports?

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1.3 The Economic Way of Thinking

List the four elements of the economic way of thinking.

“The theory of economics does not furnish a body of settled

conclusions immediately applicable to policy. It is a method

rather than a doctrine, an apparatus of the mind, a technique

of thinking which helps its possessor draw correct

conclusions.”

John Maynard Keynes, The Collected Writings of John

Maynard Keynes, Volume 7

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Use Assumptions to Simplify

Economists use assumptions to make things simpler and

focus attention on what really matters.

We have to be careful to make the right assumptions and

simplifications.

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Isolate Variables—Ceteris Paribus

Economists often consider how one variable changes in

isolation, in order to see how its changes affect other

variables.

Variable: A measure of something that can take on

different values.

Ceteris Paribus: The Latin expression meaning that other

variables are held fixed.

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Think at the Margin

How will a small change in one variable affect another

variable, and what impact will that have on people’s

decision-making?

Marginal Change: A small, one-unit change in value

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Rational People Respond to Incentives

A key assumption of most economic analysis is that people

act rationally, that is, in their own self-interest.

This does not mean that people are only motivated by self-

interest, but instead that this is their primary motivation.

Rationality implies that when the payoff (benefit) to doing

something changes, people will change their behavior to

make their payoff as large as possible.

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1.4 Microeconomics Vs Macroeconomics

The field of economics is divided into two categories:

macroeconomics and microeconomics.

Macroeconomics: The study of the nation’s economy as a

whole; focuses on the issues of inflation, unemployment, and

economic growth.

Microeconomics: The study of the choices made by

households, firms, and governments, and how these choices

affect the markets for goods and services.

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Using Macroeconomics to Understand

Why Economies Grow

The world economy has been growing in recent decades,

averaging about 1.5 percent higher per capita income per

year.

Why do some countries grow much faster than others?

Macroeconomics will help us understand why.

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Using Macroeconomics to Understand

Economic Fluctuations

All countries, even those where per capita income is

generally rising, experience economic fluctuations,

including periods where the economy temporarily shrinks.

What options do governments have to moderate these

fluctuations?

And should they do so?

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Using Macroeconomics to Make

Informed Business Decisions

A manager who studies macroeconomics will be better

equipped to understand the complexities of interest rates

and inflation, and how they affect the firm.

Should a firm borrow money now at a fixed interest rate?

Or wait a while, hoping interest rates will fall?

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Using Microeconomics to Understand

Markets and Predict Changes

One reason for studying microeconomics is to better

understand how markets work and to predict how various

events affect the prices and quantities of products in

markets.

For example, how would a tax on beer affect:

1. The price of beer?

2. How many people buy beer?

3. How many people are likely to drink and drive?

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Using Microeconomics to Make

Personal and Managerial Decisions

On the personal level, we use economic analysis to decide

how to spend our time, what career to pursue, and how to

spend and save the money we earn.

Managers use economic analysis to decide how to produce

goods and services, how much to produce, and how much to

charge for them.

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Using Microeconomics to Evaluate

Public Policies

We can use economic analysis to determine how well the

government performs its roles in the market economy.

For example, prescription drugs are protected from being

copied because of government patents.

If we shortened patent lengths, we may get cheaper generic

drugs sooner; but fewer drugs may get developed because

of the decreased profitability of drug development.

Microeconomics can help evaluate the best policy here.

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Key Terms

Ceteris paribus

Economic model

Economics

Entrepreneurship

Factors of production

Human capital

Labor

Macroeconomics

Marginal change

Microeconomics

Natural resources

Normative analysis

Physical capital

Positive analysis

Scarcity

Variable

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1A.1 Using Graphs

Economists use several types of graphs to present data,

represent relationships between variables, and explain

concepts.

Although it is possible to do economics without graphs, it’s

a lot easier with them in your toolbox.

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Figure 1A.1 Graphs of Single Variables

Left: Pie Graph for Types of Recorded Music Sold in the United States

Right: Bar Graph for U.S. Export Sales of Copyrighted Products

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Figure 1A.2 Time Series Graph

A time series graph shows how the value of a variable changes

over time. In the right panel, the vertical axis is truncated,

indicated by the double hash marks on the y-axis. This

exaggerates the fluctuations in the data.

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Figure 1A.3 Basic Elements of a Two-

Variable Graph

One variable is measured along

the horizontal, or x, axis, while

the other variable is measured

along the vertical, or y, axis.

The origin is defined as the

intersection of the two axes,

where the values of both

variables are zero.

The dashed lines show the

values of the two variables at a

particular point.

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Graphing Two Variables

The slope of a line relating two variables on a graph indicates

whether they have a positive or negative relationship.

Positive relationship: A relationship in which two variables

move in the same direction.

Negative relationship: A relationship in which two variables

move in opposite directions.

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Figure 1A.4 Relationship between

Hours Worked and Income

There is a positive

relationship between work

hours and income, so the

income curve is positively

sloped.

The slope of the curve is

$8: Each additional hour of

work increases income by

$8.

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Computing the Slope

Income
Slope

Work hours



Vertical difference between two points rise
Slope

Horizontal difference between two points run
 

Slope of a curve: The vertical difference between two points (the rise)

divided by the horizontal difference (the run).

In general, if the variable on the vertical axis is y and the variable on the

horizontal axis is x, we can express the slope as:

Slope
y

x



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Figure 1A.5 Movement Along a Curve

versus Shifting the Curve

To draw a curve showing the

relationship between hours worked

and income, we fix the weekly

allowance ($40) and the wage ($8

per hour).

A change in the hours worked

causes movement along the curve,

for example, from point b to point c.

A change in any other variable shifts

the entire curve. For example, a $50

increase in the allowance (to $90)

shifts the entire curve upward by

$50.

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Figure 1A.6 Negative Relationship between

CD Purchases and Downloaded Songs

There is a negative relationship between

the number of CDs and downloaded

songs that a consumer can afford with a

budget of $360.

The slope of the curve is −$12: Each

additional CD (at a price of $12 each)

decreases the number of downloadable

songs (at $1 each) by 12 songs.

Vertical difference
Slope

Horizontal difference

120 240 120
12

20 10 10

 
  

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Figure 1A.7 Nonlinear Relationships (1 of 2)

There is a positive and nonlinear

relationship between study time

and the grade on an exam. As

study time increases, the exam

grade increases at a decreasing

rate.

For example, the second hour of

study increased the grade by 4

points (from 6 points to 10 points),

but the ninth hour of study

increases the grade by only 1 point

(from 24 points to 25 points).

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Figure 1A.7 Nonlinear Relationships (2 of 2)

There is a positive and nonlinear

relationship between the quantity of

grain produced and total production

cost. As the quantity increases, the

total cost increases at an increasing

rate.

For example, to increase production

from 1 ton to 2 tons, production cost

increases by $5 (from $10 to $15) but

to increase the production from 10 to

11 tons, total cost increases by $25

(from $100 to $125).

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1A.2 Computing Percentage Changes

and Using Equations

To compute a percentage change, we divide the change in

the variable by the initial value of the variable, and then

multiply by 100:

New value initial value
Percentage change 100

Initial value


 

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Application 3: The Perils of

Percentages (1 of 2)

In the 1970s, the government of Mexico City repainted the

highway lane lines on the Viaducto to transform a four-lane

highway into a six-lane highway.

• The government announced that the highway capacity had

increased by 50% (equal to 2 divided by 4).

• Unfortunately, the number of collisions and traffic fatalities

increased, and one year later the government restored the

four-lane highway and announced that the capacity had

decreased by 33% (equal to 2 divided by 6).

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Application 3: The Perils of

Percentages (2 of 2)

This anecdote reveals a potential problem with using the

simple approach to compute percentage changes. Because

the initial value (the denominator) changes, the computation

of percentage increases and decreases are not symmetric.

There is a solution to this problem: using the midpoint

method for percentage changes:

New value initial value
Percentage change 100

Average value


 

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Using Equations to Compute Missing

Values (1 of 2)

It will often be useful to compute the value of the numerator

or the denominator of an equation. For example, if we know

the change in work hours, and the slope of the line relating

change in income and change in work hours:

Income
Slope

Work hours



Work hours Slope Income   

Income Work hours Slope   

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Using Equations to Compute Missing

Values (2 of 2)

Income Work hours Slope   

Then, if you work seven extra hours, and the slope of this

line is $8 per hour, then your change in income is:

Income 7 hours $8per hour

Income $56

  

 

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Key Terms (Appendix)

Negative relationship

Positive relationship

Slope of a curve

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Copyright

This work is protected by United States copyright laws and is

provided solely for the use of instructors in teaching their

courses and assessing student learning. Dissemination or sale of

any part of this work (including on the World Wide Web) will

destroy the integrity of the work and is not permitted. The work

and materials from it should never be made available to students

except by instructors using the accompanying text in their

classes. All recipients of this work are expected to abide by these

restrictions and to honor the intended pedagogical purposes and

the needs of other instructors who rely on these materials.

Survey of Economics: Principles,

Applications and Tools
Eighth Edition

Chapter 2

The Key Principles of

Economics

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Chapter Outline

2.1 The Principle of Opportunity Cost

2.2 The Marginal Principle

2.3 The Principle of Voluntary Exchange

2.4 The Principle of Diminishing Returns

2.5 The Real-Nominal Principle

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2.1 The Principle of Opportunity Cost

Apply the principle of opportunity cost.

Economics is all about making choices; to make good

choices, we must compare the benefit of something to its

cost.

Opportunity Cost: What you sacrifice to get something.

“There is no such thing as a free lunch”

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Application 1: The cost of doing business

Jack left a job paying $60,000 per year to
start his own florist shop in a building he
owns. The market value of the building
is $80,000. He pays $30,000 per year for
flowers and other​ supplies, and has a bank
account that pays 5 percent interest. What is
the economic cost of​ Jack’s business?

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The Cost of Military Spending

The war in Iraq cost the United States an estimated $1

trillion. Each $100 billion could:

• Enroll 13 million preschool children in the Head Start

program for one year.

• Hire 1.8 million additional teachers for one year.

• Immunize all the children in less-developed countries for

the next 33 years.

The true cost of the war was its opportunity cost: what the

United States sacrificed for it.

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Figure 2.1 Scarcity and the Production

Possibilities Curve (1 of 3)

Production possibilities

curve: A curve that shows

the possible combinations

of products that an

economy can produce,

given that its productive

resources are fully

employed and efficiently

used.

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Figure 2.1 Scarcity and the Production

Possibilities Curve (2 of 3)

The production

possibilities curve

illustrates the principle of

opportunity cost for an

entire economy.

An economy has a fixed

amount of resources. If

these resources are fully

employed, an increase in

the production of wheat

comes at the expense of

steel.

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Figure 2.1 Scarcity and the Production

Possibilities Curve (3 of 3)

Each additional 10 tons of

wheat requires sacrificing

progressively more steel—

50 tons from a to b, 180

tons from c to d.

Some resources are better

suited for steel production,

and some are better suited

to wheat production.

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Figure 2.2 Shifting the Production

Possibilities Curve

An increase in the quantity

of resources or

technological innovation in

an economy shifts the

production possibilities

curve outward.

Starting from point f, a

nation could produce more

steel (point g), more wheat

(point h), or more of both

goods (points between g

and h).

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2.2 The Marginal Principle

Apply the marginal principle.

We rarely make all-or-nothing choices. Economists tend to think

in marginal terms: the effect of a small or incremental change.

Marginal benefit: The additional benefit resulting from a small

increase in some activity.

Marginal cost: The additional cost resulting from a small

increase in some activity.

The marginal principle: Increase the level of an activity as long

as its marginal benefit exceeds its marginal cost. Choose the

level at which the marginal benefit equals the marginal cost.

Application 2: Hiring people

1) The table below shows the marginal benefit that Khaled earns from keeping his store
open one more hour. Khaled has a marginal cost of $40 per hour. Khaled stays open
20 hours.

a) Do you think Khaled’s decision to stay open 20 hours is optimal? Why? (1 mark)

b) How many hours do you advise Khaled to stay open? Why? (2 marks)

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2.3 The Principle of Voluntary Exchange

Apply the principle of voluntary exchange.

Why would two people trade with one another?

Because each believes that what they receive is worth

more to them than what they give.

The principle of voluntary exchange: A voluntary

exchange between two people makes both better off.

Example: When you work, you trade your time for money.

The money is more valuable than the time to you, and your

time is more valuable than the money to your employer.

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2.4 The Principle of Diminishing

Returns

Apply the principle of diminishing returns.

You run a small copy shop with one copying machine and

one worker, who can copy 500 pages per hour.

You add another worker, but output increases to only 800

pages per hour, not doubling to 1,000.

Why? They now share the copier, so each is less productive.

The principle of diminishing returns: Suppose output is

produced with two or more inputs, and we increase one input

while holding the other input or inputs fixed. Beyond some

point—called the point of diminishing returns—output will

increase at a decreasing rate.

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Why Do Diminishing Returns Occur?

Diminishing returns occurs because one of the inputs to the

production process is fixed.

When a firm can vary all its inputs, including the size of the

production facility, the principle of diminishing returns is not

relevant.

If you doubled both the number of workers and equipment,

output ought to double also—or maybe more than double, if

specialization is beneficial.

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Application 4: Fertilizer and Crop Yields

Adding fertilizer to a field

increases its production; but

this is subject to diminishing

returns.

Why? The other inputs to the

production process are fixed,

such as the field itself, the rain,

the sunlight, etc. Each

additional bag of fertilizer is

progressively less productive.

Some representative numbers

are on the next slide.

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Table 2.1 Fertilizer and Corn Yield

Bags of Nitrogen Fertilizer Bushels of Corn per Acre

0 85

1 120

2 135

3 144

4 147

The first bag of fertilizer increases production by 35

bushels, but subsequent bags of fertilizer increase

production by less and less.

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2.5 The Real-Nominal Principle

Apply the real-nominal principle.

Most modern money is not inherently valuable, but is

valuable because of what it will buy.

The real-nominal principle: What matters to people is the

real value of money or income—its purchasing power—not

its face value.

Nominal value: The face value of an amount of money.

Real value: The value of an amount of money in terms of

what it can buy.

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Table 2.2 The Real Value of the

Minimum Wage, 1974–2015

Blank 1974 2015

Minimum wage per hour $2.00 $7.25

Weekly income from minimum wage 80 290

Cost of a standard basket of goods 47 236

Number of baskets per week 1.70 1.23

Between 1974 and 2015, the federal minimum wage increased

from $2.00 to $7.25.

Was the typical minimum-wage worker better or worse off in

2015?

We can apply the real-nominal principle to see that the value of

the minimum wage has actually decreased over this time period.

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Application 5: Repaying Student Loans

Suppose you finish college with $40,000 in student loans and

start a job that pays a salary of $50,000 in the first year. In 10

years, you must repay your college loans. Which would you

prefer, stable prices, rising prices, or falling prices?

Hint: The nominal value of the loans will not change, even as

prices change.

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Key Terms

Marginal benefit

Marginal cost

Opportunity cost

Production possibilities curve

Nominal value

Real value

Copyright © 2020, 2017, 2014 Pearson Education, Inc. All Rights Reserved

Copyright

This work is protected by United States copyright laws and is

provided solely for the use of instructors in teaching their

courses and assessing student learning. Dissemination or sale of

any part of this work (including on the World Wide Web) will

destroy the integrity of the work and is not permitted. The work

and materials from it should never be made available to students

except by instructors using the accompanying text in their

classes. All recipients of this work are expected to abide by these

restrictions and to honor the intended pedagogical purposes and

the needs of other instructors who rely on these materials.

Survey of Economics: Principles,

Applications and Tools
Eighth Edition

Chapter 3

Demand, Supply, and

Market Equilibrium

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Chapter Outline

3.1 The Demand Curve

3.2 The Supply Curve

3.3 Market Equilibrium: Bringing Demand and Supply

Together

3.4 Market Effects of Changes in Demand

3.5 Market Effects of Changes in Supply

3.6 Predicting and Explaining Market Changes

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4.1 The Demand Curve

Describe and explain the law of demand.

In this chapter, we will develop the model of demand and

supply—the most important tool of economic analysis.

We will assume markets are perfectly competitive,

implying that individual sellers are so small they cannot

affect the market price.

Perfectly competitive market: A market with many buyers

and sellers of a homogeneous product and no barriers to

entry.

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Consumers and Demand

How much of a particular product are consumers willing to

buy during a particular period? We call this the quantity

demanded.

Quantity demanded: The amount of a product that

consumers are willing and able to buy.

What alters the amount consumers are willing to buy? We

divide this into two categories:

• The price of the product

• Everything else!

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Figure 3.1 The Individual Demand

Curve (1 of 4)

The table shows how

many pizzas a consumer

will buy at a selection of

prices. This is a demand

schedule.

Demand schedule: A

table that shows the

relationship between the

price of a product and the

quantity demanded,

ceteris paribus.

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