Chapter 3Demand and supplyDemand is the amount of a product that consumers are willing and able to purchase at any given price. It isassumed that this is effective demand, i.e. it is backed by money and an ability to buy.PriceThe demand curveDDQuantityThe law of demand states that the higher the price, the lower the quantity demanded; and the lower theprice, the higher the quantity demanded. Naturally, consumers are willing and able to buy less as the pricerises. This results in a downward sloping demand curve.Movements along the demand curve are therefore caused by changes in price.Supply is the amount of a product which suppliers will offer to the market at a given price.PriceThe supply curveSSQuantityAs the price of an item goes up, suppliers will attempt to maximize their profits by increasing the quantityoffered for sale. This means that the lower the price, the lower the quantity supplied; and the higher theprice, the higher the quantity supplied. At low price levels only the most efficient suppliers can make a profitso supply is limited. As price increases, the profit motive attracts new resources to supply and the higherprice allows less efficient producers to make a profit. So as price increases, supply increases.Movements along the supply curve are therefore caused by changes in price.EquilibriumPriceMarket equilibrium priceDSPDSQQuantityWhere the demand curve and the supply curve intersect, we have a point where th ...
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