五 、
Investment
Tools: Economics: Microeconomic Analysis
1.A: Preliminary Reading: Supply, Demand, and the Market Process
a: Explain the laws of supply and demand.
All else held constant, a higher price will increase the supply of goods produced and offered
for sale. Existing producers will produce more, and new suppliers will enter the market. The
law of supply states that there is a direct relationship between the price of a good and the
amount of that good that will be supplied in the market place.
People’s desire for goods exceeds the purchasing power of their incomes. This forces them
to make choices. People will choose those alternatives that enhance their welfare most
relative to their cost. An increase in the cost of an item relative to alternative consumption
choices reduces the likelihood of purchasing that item. Higher prices reduce the demand for
an item and lower prices raise the demand for an item. This is called the law of demand. The
availability of substitutes is the main reason that consumers buy less of a product as its price
increases. Substitutes are goods that perform similar functions. The law of demand states
that there is an inverse relationship between the price of a good and the amount buyers are
willing to purchase.
Market demand schedule: The demand curve will slope downward to the right, indicating that
the number of units demanded will increase as the price declines. Some goods are much
more responsive to changes in price than others. The greater the number of viable
substitutes for a good the more responsive demand is to price. When interpreting the
demand curve, remember that we have assumed that factors other than price, such as
consumer income, have not changed significantly
b: Discuss how market prices respond to changes in supply and demand.
A market is the environment that encompasses the trading arrangements of buyers and
sellers that underlie the forces of supply and demand. Equilibrium occurs when the conflicting
forces creating supply and demand are in balance. In the absence of shifts in supply and
demand curves, if the price is so high that supply exceeds demand, some businesses will
decrease their prices to sell their excess inventory while others elect to reduce production.
The result is a reduction in both price and supply until the market is in equilibrium.
Conversely, if demand exceeds supply, the price of the product will rise, resulting in reduced
demand as consumers find substitutes and increased supply as producers add capacity. This
will occur until the market is in equilibrium.
c: Explain the difference between shifts in and movements along supply and demand curves.
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