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Demand, Supply, and Market Equilibrium
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The circular flow of economic activity shows how firms and households interact in input and output markets.
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households supply their savings, for interest or for claims to future profits, to firms that demand funds to buy capital goods.
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Quantity demanded is the amount (number of units) of a product that a household would buy in a given time period if it could buy all it wanted at the current market price.
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A demand schedule is a table showing how much of a given product a household would be willing to buy at different prices.
Demand curves are usually derived from demand schedules.
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The demand curve is a graph illustrating how much of a given product a household would be willing to buy at different prices.
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Inferior Goods are goods for which demand falls when income rises.
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Change in income, preferences, or prices of other goods or services leads to Change in demand (Shift of curve).
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Quantity supplied represents the number of units of a product that a firm would be willing and able to offer for sale at a particular price during a given time period.
A supply schedule is a table showing how much of a product firms will supply at different prices.
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6 5 4 3 2 1 0 0 10 20 30 40 50
Thousands of bushels of soybeans produced per year
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6 5 4 3 2 1 0 0 10 20 30 40 50
Thousands of bushels of soybeans produced per year
The law of supply states that there is a positive relationship between price and quantity of a good supplied.
This means that supply curves typically have a positive slope.
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Shift of Supply Curve for Soybeans Following Development of a New Seed Strain
In this example, since the factor affecting supply is not the price of soybeans but a technological change in soybean production, there is a shift of the supply curve rather than a movement along the supply curve.
The technological advance means that more output can be supplied for at any given price level.
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Market Equilibrium
Market equilibrium is the condition that exists when quantity supplied and quantity demanded are equal. At equilibrium, there is no tendency for the market price to change.
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Market Equilibrium
Only in equilibrium is quantity supplied equal to quantity demanded.
At any price level other than P0, such as P1, quantity supplied does not equal quantity demanded.
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Excess Demand
Excess demand, or shortage, is the condition that exists when quantity demanded exceeds quantity supplied at the current price.
When quantity demanded exceeds quantity supplied, price tends to rise until equilibrium is restored.
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Excess Supply
Excess supply, or surplus, is the condition that exists when quantity supplied exceeds quantity demanded at the current price.
When quantity supplied exceeds quantity demanded, price tends to fall until equilibrium is restored.
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Changes in Equilibrium
Higher demand leads to higher equilibrium price and higher equilibrium quantity.
Higher supply leads to lower equilibrium price and higher equilibrium quantity.
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Changes in Equilibrium
The relative magnitudes of change in supply and demand determine the outcome of market equilibrium.
2004 Prentice Hall Business Publishing Principles of Economics, 7/e Karl Case, Ray Fair 46 of 48
When supply and demand both increase, quantity will increase, but price may go up or down.
2004 Prentice Hall Business Publishing Principles of Economics, 7/e Karl Case, Ray Fair 47 of 48
land market
law of demand law of supply market demand market supply movement along a demand curve normal goods
Principles of Economics, 7/e
quantity supplied
shift of a demand curve substitutes supply curve supply schedule wealth or net worth
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