Chapter+4+The+Market+Forces+of+Supply+and+Demand.JAKS

=Chapter 4. = =The Market Forces of Supply and Demand =



= = =D**efinitions** =  market: a group of buyers and sellers of a particular good or service competitive market: a market in which there are many buyers and many sellers so that each has a negligible impact on the market price quantity demanded: the amount of a good that buyers are willing and able to purchase law of demand: the claim that, other things equal, the quantity demanded of a good falls when the price of the good rises demand schedule: a table that shows the relationship between the price of a good and the quantity demanded demand curve: a graph of the relationship between the price of a good and the quantity demanded normal good: a good for which, other things equal, an increase in income leads to an increase in demand inferior good: a good for which an increase in income leads to a decrease in demand substitutes: two goods for which an increase in the price of one leads to an increase in the demand for the other complements: two goods for which an increase in the price of one leads to a decrease in the demand for the other quantity supplied: the amount of a good that sellers are willing and able to sell law of supply: the claim that, other things equal, the quantity supplied of a good rises when the price of the good rises supply schedule: a table that shows the relationship between the price of a good and the quantity supplied supply curve: a graph of the relationship between the price of a good and the quantity supplied equilibrium: a situation in which the market price has reached the level at which quantity supplied equals quantity demanded surplus: too many goods shortage: too few goods to satisfy desire

=**LEARNING OBJECTIVES:** =  By the end of this chapter, students should understand: 1. How demand curve works. 2. How supply curve works. 3. Why markets are a good way to organize economy.

**I. Brief Tour of Supply and Demand**
 1. This is not a hard chapter. It is possible to condense it down to relatively few paragraphs. 2. In order to explain phenomenon present in market economy, economists use the law of supply and demand, which explains about supply and demand. 3. Demand is a term used to describe consumer's desire to purchase goods. Supply is a term to describe producer's desire to sell goods. 4. Curves are calculated by finding how much consumers and producer(suppliers) want to buy or sell at the given price. As a result, price, although plotted on the y-axis, is actually the independent variable. 5. Naturally, the demand curve will have to be downward sloped because obviously, when goods are expensive, you don't want to buy much whereas you buy inexpensive goods. the supply curve is quite obvious, too. Firms want to sell more at a higher price because well, who doesn't like money? 6. There are factors that change demand curve or supply curve. Income determines normal and inferior good. Normal goods are goods like diamonds, where high income leads to higher demand. Inferior goods are like public transportation, where lower income leads to higher demand. Price of related goods are also important. Substitutes are pairs of goods that are used in place of each other (positive relationship in one's price and the other's demand), whereas complements are complement...(negative relationship in one's price and the other's demand). 7. Besides these, expectations, taste, number of buyers are factors that change demand curve. 8. Supply curve has factors, too, such as input price, technology, expectations, number of sellers. 9. Equilibrium is where supply curve and demand curve meet. At this point, different desires between buyers and sellers match, and is the ideal situation in the market economy. 10. Price is the key instrument because it pushes the curve to intersect and, is the clear indicator of how much the good is worth to people-central part of market economy. 11. And that's it. Not difficult, right?

II. Graph of Supply and Demand



Chinese saying: 百聞不如一見 -> Seeing once is better than hundred saying.


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=**THANK YOU **=

**Review Questions **
 <span style="font-family: 'Palatino Linotype','Book Antiqua',Palatino,serif;"> Question: Describe why price is the key instrument in the market economy.

Answer: It is because it reflects buyer's and seller's desire to satisfy scarcity.