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4. Demand and Supply Review View Entire Chapter 4  2/27/19

  A. A market is defined as an institution or mechanism which promotes trade
            by bringing together buyers (demanders) and sellers (suppliers).
            1. Replaced barter which is the direct exchange of goods.
            2  Modern market brings money and prices into the circular flow of goods. 
  B. Demand is willingness to buy.
                                                                                       


1. Demand is a schedule of the amounts of goods and services
    consumers are willing and able to buy at a set of prices. 
2. Total demand
Horizontal Sum of individual demand.
3. Law of demand price and quantity are inversely related and
    as price goes up, quantity demanded goes down, vice versa
   
 

4. Why more is bought as price drops.
  
 Income Effect: price drops, consumers feel richer
    
Substitution Effectprice drops, it becomes cheaper relative
    to other goods and consumers buy more

C. What determines demand   
         
1. Tastes or preferences of consumers    
         
2. Number of consumers    
         
3. Incomes of consumers
            
 a. normal (superior) goods such as steak and vacations - more is purchased as income increases. 
            
 b inferior goods such as bread and hamburger - less is purchased as income increases.
         
4. Consumer expectations    
         
5. Price of related goods
             
a. Substitutes are goods that compete with each other such as hot dogs and hamburgers.
                 If the price of a good increases, the demand for its substitutes will increase.
          
   b. Complements are goods that are purchased together like hot dogs and rolls. 
                   If the price of a good increases, the demand for its complement will decrease.
    
      5.
''Ceteris Paribus'' is Latin for all other variables remain the same. So we change one variable at a tome.
     D. Changes (shifts) in Demand
     
   1. A decrease in demand shifts the demand curve to the left 
   
     2. An increase in demand shifts the demand curve to the right

E. Supply is willingness to sell
        
1. Supply is a schedule of the amounts of goods or services producers are willing and 
             able to sell at a set of prices.
         2. Law of supply: price and quantity supplied are directly related because price and 
             expected profit are directly related
             a. As price goes up, quantity supplied goes up
             b. As price goes down, quantity supplied goes down

     F. What determines supply
        
1. Product costs as affected by technology, resource prices, government involvement with taxes
             and subsidies
         2. Price of related goods
             a. If 2 goods are substitutes, price up for one will increase supply of the other (price of gasoline up, 
                supply of alternative fuels increases) as companies see more potential profit
             b. If 2 goods are complements, price down of one will increase supply of other (price of PC's down, 
                 supply of computer software up) as the expected increase in sales of the first item should increase 
                 sales of the complement.
         3. Number of producer and their expectations concerning the above listed variables will affect supply
    G. Changes (shifts) in supply
         1. A decrease in supply shifts the supply curve to the left
         2. An increase in supply shifts the supply curve to the right

H. Equilibrium is where suppliers and demanders agree on price and quantity as depicted by E. 
         1. If the price is too high, a surplus results and price must be lowered
         2. If the price is too low, a shortage results. This happens with toys every Christmas
              (Cabbage Patch Dolls)
         3. If they can not agree, as happened with Beta videotape machines, then the curves do not intersect
             and the goods are not sold.
         4. Rationing function of price makes for an efficient allocation of resources.
             Whencompetitive forces of supply and demand result in an equilibrium, a rationing function of
             goods produce to consumers has occurred.