15. Principles of Economics (Brief Edition)_2e (3)

Chapter 3: Supply and . Describe how the demand curve summarizes. the behavior of buyers in the . Describe how the supply curve summarizes the. behavior of sellers in the . Describe how the supply and demand curves. interact to determine equilibrium price and. . Explain how shifts in supply and demand curves. cause prices and quantities to . Explain and apply the Efficiency . Explain and apply the Equilibrium ­Hill/Irwin Copyright © 2011 by The McGraw­Hill Companies, Inc. All rights reserved. What, How, and For Whom?.• Every society answers three basic questions. 3­2Buyers and Sellers in the Market.• The market for any good consists of all the buyers and. sellers of the good.• Buyers and sellers have different motivations. – Buyers want to benefit from the good. – Sellers want to make a profit.• Market price balances two forces. – Value buyers derive from the good. – Cost to produce one more unit of the good.• Buyers buy more at lower prices & buy less at higher prices.• What happens when price goes up?. – The substitution effect: Buyers switch to substitutes when. price goes up. – The income effect: Buyers overall purchasing power goes. down. 3­3Demand.• A demand curve illustrates the quantity buyers would. purchase at each possible price.• Demand curves have a negative slope. • Consumers buy less at higher prices. • Consumers buy more at lower pricesDemand Slopes Downward.• Buyers value goods differently. – The buyer’s reservation price is the highest price an. individual is willing to pay for a good.• Demand reflects the entire market, not one consumer. – Lower prices bring more buyers into the market. – Lower prices cause existing buyers to buy more. 3­4Interpreting the Demand Curve. Horizontal interpretation of. Demand for Pizzas demand: Given price, how. P much will buyers buy? Vertical interpretation of. $4. demand: Given the quantity. to be sold, what price is the. $2 marginal consumer willing to. D pay?. Q. 8 16. (000s of slices/day). 3­5 The Supply Curve.• The supply curve illustrates the quantity of a. good that sellers are willing to offer at each price. – If the price is less than opportunity cost, offer. more.• Opportunity cost differs among sellers due to. – Technology ■ Different costs such as rent. – Skills ■ Expectations• The Low-Hanging Fruit Principle explains the. upward sloping supply curve.• The seller’s reservation price is the lowest price. the seller would be willing to sell for. – Equal to marginal cost. 3­6Interpreting the Supply Curve. Horizontal interpretation. Supply of Pizzas of supply:. P Given price, how much. S will suppliers offer?.$4. Vertical interpretation of.$2 supply:. Given the quantity to be. Q sold, what is the. 8 16. (000s of slices/day). opportunity cost of the. marginal seller? 3­7 Market Equilibrium.• A system is in equilibrium when th