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Demand, Supply and Price (Part 1) Market Price D S P* 0 Q* Quantity I. Demand Curve II. Supply Curve III. Equilibrium Price & Quantity NMH\s4econ\dsprev1 1 I. Demand P Demand curve shows the quantities demanded at all prices. D 6 5 4 P ($) Qty demanded 3 0 3 4 5 6 Demand NMH\s4econ\dsprev1 Q 6 3 5 4 4 5 3 6 2 The Law of Demand states that when the price of a good increases, the quantity demanded for the good will decrease, vice versa and ceteris paribus. P D P Qd P Qd 0 Q Demand curve will be downward sloping. NMH\s4econ\dsprev1 3 It is wrong to say that: D PD or P D D represents the entire demand curve. Its shifts are not caused by any change in the price of the good. It should be: P Qd or P Qd Movement along the same demand curve. NMH\s4econ\dsprev1 4 Demand Quantity demanded The entire plan of purchase: quantities demanded at all prices. The quantity planned to buy at a particular price. It is represented by the entire demand curve. It is represented by a point on the X-axis. NMH\s4econ\dsprev1 5 Quantity Demanded Quantity purchased Quantity bought Quantity transacted The quantity planned to buy. The quantity has been bought actually. NMH\s4econ\dsprev1 6 IV. Market demand Market demand curve is the horizontal summation of all individual demand curves. P D 6 8 Da 0 NMH\s4econ\dsprev1 24 10 Db Dc Q 7 II. Supply Supply curve shows the quantities supplied at all prices. P S 6 5 4 P ($) Qty supplied 3 0 2 3 4 5 Supply NMH\s4econ\dsprev1 Q 6 5 5 4 4 3 3 2 8 The Law of Supply states that when the price of a good increases, the quantity supplied of the good will increase, vice versa and ceteris paribus. P S P Qs P Qs 0 Q Supply curve will be upward sloping. NMH\s4econ\dsprev1 9 It is wrong to say that: P S or PS It should be: P Qs or P Qs Supply Quantity supplied Quantity supplied Quantity sold Quantity transacted NMH\s4econ\dsprev1 10 IV. Market supply Market supply curve is the horizontal summation of all individual supply curves. P Sf 5 0 NMH\s4econ\dsprev1 Sg 9 Sh 13 S 27 Q 11 III. Equilibrium price and quantity P ($) Qty demanded 6 5 4 3 Qty supplied 3 4 5 6 P 5 4 3 2 D S 6 5 4 3 0 NMH\s4econ\dsprev1 2 3 4 5 6 Q 12 P D Excess supplyS P= 6 5 4 3 0 When P = $6, 2 3 4 Qd 5 6 Q Qs Qd = 3 units and Qs = 5 units. There will be an excess supply of 2 units (= 5 - 3). The price will decrease until no excess supply at all. NMH\s4econ\dsprev1 13 P D S 6 5 4 Excess demand P= 3 0 When P = $3, 2 3 4 Qs 5 6 Q Qd Qd = 6 units and Qs = 2 units. There will be an excess demand of 4 units (= 6 - 2). The price will increase until no excess demand at all. NMH\s4econ\dsprev1 14 P D S 6 P= 5 Equilibrium 4 3 0 When P = $5, 2 3 4 Qs 5 6 Q Qd Qd = 4 units and Qs = 4 units. Equilibrium will appear, where $5 and 4 units are equilibrium price and quantity respectively. NMH\s4econ\dsprev1 15 Definitions: Excess supply or surplus means that the quantity supplied is greater not S > D than the quantity demanded at a price which is above the equilibrium price. the condition Excess demand or shortage means that the quantity demanded is not D > S greater than the quantity supplied at a price which is below the equilibrium price. the condition NMH\s4econ\dsprev1 16 Definitions: Equilibrium appears when the quantity demanded is equal to the quantity supplied; there will be no tendency for the price to change. not D = S no internal force to change the price NMH\s4econ\dsprev1 17 Demand, Supply and Price (Part 1) The End NMH\s4econ\dsprev1 18