Week 2 chapter notes

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Economics for Management Studies
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Chapter 2 The Basics of Supply and Demand Notes N supply-demand analysis is fundamental and powerful tool that can be applied to variety of interesting and important problems N to name a few: o understanding and predicting how changing world economic conditions affect market price and production o evaluating the impact of government price controls, minimum wages, price supports, and production incentives o determining how taxes, subsidies, tariffs, and import quotas affect consumers and producers N without government intervention, supply and demand will come into equilibrium to determine both the market price of a good and the total quantity produced, which depends on the particular characteristics of supply and demand N variations of price and quantity over time depend on the ways in which supply and demand respond to other economic variables, such as aggregate economic activity and labour costs, which are themselves changing 2.1 Supply and Demand The Supply Curve N supply curve relationship between the quantity of a good that producers are willing to sell and the price of the good N vertical axis shows price of good, P, measured in dollars per unit, which is price that sellers receive for a given quantity supplied N horizontal axis shows the total quantity supplied, Q, measured in the number of units per period N the supply curve is thus a relationship between the quantity supplied and the price N the higher the price, the more that firms are able and willing to produce and sell N quantity can depend on other variables, such as on production costs, including wages, interest charges, and costs of raw materials N when production costs decrease, output increases no matter what the market price happens to be and the supply curve shifts right The Demand Curve N demand curve relationship between the quantity of a good that consumers are willing to buy and the price of the good N the demand curve slopes downward: consumers are usually ready to buy more if the price is lower N the quantity of a good that consumers are wiling to buy can depend on price and income N a lower price may encourage consumers who have already been buying the good to consume larger quantities or it may allow consumers who were previously unable to afford the good to begin buying it N with greater incomes, consumers can spend more money on any good, and some consumers will do so for most goods N changes in the prices of related goods also affect demand N substitutes two goods for which an increase in the price of one leads to an increase in the quantity demanded of the other N complements two goods for which an increase in the price of one leads to a decrease in the quantity demanded of the other 2.2 The Market Mechanism N the next step is to put the supply curve and demand curve together N the vertical axis shows
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