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Economics Module 3 Notes Module 3 1 How Markets Work By the end of this module you should be able to 1 Correlate how an individual s comprehension of supply and demand can make them a better informed consumer quantity demanded 2 Explain using tables or graphs as appropriate the relationship between price and 3 Relate demand curve to a demand schedule table 4 5 Explain using tables or graphs as appropriate the relationship between price and Illustrate increase decrease in quantity demanded and quantity supplied on a graph quantity supplied 6 Relate a supply curve to a supply schedule table 7 Explain how a free market responds to a surplus excess supply 8 Recognize factors that affect supply and demand 9 Define excise taxes tariffs and subsidies 10 Explain how the changes in supply and or demand affect equilibrium prices and quantities Module 3 2 Why Supply Demand Matters Market Any place where buyers and sellers meet to exchange goods and services Most markets are based on voluntary exchange Voluntary exchange the act of buyers and sellers freely and willingly engaging in market transactions Price signals the information that markets generate to guide the distribution of resources Supply Demand When the price goes up people buy less When the price goes down people buy more If the price is high sellers would like to sell more of the product but buyers would buy less that results in a surplus for the seller Surplus an amount of something left over when requirements have been met an excess of production or supply over demand If the price is low sellers would like to sell less of the product but buyers would buy more that results in a shortage for the seller Shortage a situation in which the demand for a product or service exceeds its supply in a market Equilibrium price is where supply quantity demand quantity Equilibrium quantity the quantity demanded or supplied at the equilibrium price There s only four behaviors of the market Four market behaviors 1 Supply increase 2 Supply decrease 3 Demand increase 4 Demand decrease Module 3 3 What is Demand and the Law of Demand Demand the relationship between prices and quantities demanded The Law of Demand speci es that all else equal there is an inverse relationship between prices and quantities demanded This means that prices and quantities demanded move in the opposite direction and demand curves slope downward Module 3 4 Changes in Demand vs Changes in Quantity Demanded A change in quantity demanded is a movement along the demand curve in A change in demand is a shift of the entire demand curve in response to a change response to a change in price in something other than price When economists talk about demand they mean the relationship between a range of prices and the quantities demanded at those prices as illustrated by a demand curve or a demand schedule Module 3 5 What is Supply And Law of Supply Supply the relationship between prices and quantities supplied The Law of Supply speci es that all else equal there is a direct relationship between prices and quantities supplied This means that prices and quantities supplied move in the same direction and supply curves slope upward More of a good will be provided the higher its price Less of a good will be provided the lower its price Supply Schedule a table that shows the relationship between a price of a good and the quantity supplied Supply Curve a graphical depiction of the supply schedule that illustrates that relationship between a price of a good and the quantity supplied Module 3 6 Changes in Supply vs Changes in Quantity Supplied When economists refer to supply they mean the relationship between a range of prices and the quantities supplied at those prices a relationship that we can illustrate with a supply curve or a supply schedule A change in quantity supplied is a movement along the supply curve in response to A change in supply is a shift of the entire supply curve in response to a change in a change in price something other than price Module 3 7 Market Equilibrium quantity in the market The intersection of supply and demand determines the prevailing price and If a surplus exist price must fall If a shortage exists prices rise A subsidy will shift the supply curve to the right When there is an increase in unit tax supply would decrease When the supply curve shifts to the right it means a decrease in the quantity of When the supply curve shifts to the left it means an increase in the quantity of product Inferior goods mean demand drops when people s incomes rise vice versa A decrease in supply will cause price to rise quantity demanded will A decrease in demand will cause price to fall quantity supplied will product supplied supplied decrease decrease Module 3 8 Disequilibrium Surpluses and Shortages Module 3 9 Factors that Change Shift Demand Module 3 10 Factors that Change Shift Supply Module 3 11 Changes in Equilibrium


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