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market demand image 1

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Movements Along the Demand Curve graph

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what shifts demand curve

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Movements Along the Demand Curve

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An individual supply curve graphs your selling plans.

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law of supply

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Figure 4 | Applying the Core Economic Principles to Your Supply Decisions

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The Rational Rule for Sellers in Competitive Markets

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Consequently, you should stop increasing the quantity of gas you supply just before the marginal cost exceeds the price—which occurs in competitive markets when the price equals marginal cost

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As a result, supply curves tend to be upward-sloping.

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To find the total quantity supplied at a given price, simply add up the quantity supplied by each individual supplier.

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Movements Along the Supply Curve

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As Figure 6 illustrates, a rightward shift is an increase in supply, because at each and every price, the quantity supplied is higher. A leftward shift is a decrease in supply, because the quantity supplied is lower at each and every price.

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Supply shifter one: Input prices.

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Supply shifter two: Your business’s productivity and technology.

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Supply shifter three: Prices of related outputs.

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Supply shifter four: Expectations.

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Supply shifter five: The type and number of sellers.

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Movements Along the Supply Curve

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Supply Equals Demand

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Getting to Equilibrium

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shifts in demand

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Shifts in Supply

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price elasticity of demand

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Elastic demand curves are relatively flatter than inelastic demand curves.

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The spectrum from perfectly inelastic to perfectly elastic demand.

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Price Elasticity of Demand for Consumer Goods

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Use the midpoint formula to calculate the percent changes in price and quantity.

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Thus the midpoint formula for calculating the percent change in price is:

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If you rearrange the formula for price elasticity of demand, you see that

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Total revenue is the total amount you receive from buyers, which equals price times quantity:

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Total revenue is shown graphically in Figure 4.

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Higher prices lead to less total revenue if demand is elastic.

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cross-price elasticity of demand

measures how responsive the quantity demanded of one good is to price changes of another.

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The cross-price elasticity is near zero for independent goods.

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income elasticity of demand

measures how responsive your demand for a good is to changes in your income.

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Income Elasticity of Demand for Various Goods

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To measure the price elasticity of supply, observe how the quantity supplied responds to a price change. Specifically, you can measure the price elasticity of supply as the ratio of the percent change in quantity supplied to the percent change in price as you move along your supply curve. That is:

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Figure 7 | Inelastic and Elastic Supply

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Thus, the formula for calculating the percent change in quantity is:

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Thus the formula for calculating the percent change in price is:

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Figure 1: Effects of Taxing Soda Sellers in Philadelphia

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A tax on buyers shifts the demand curve.

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Figure 3: Price Elasticity and Tax Incidence

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Price Elasticity and Tax Incidence

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Rent Control and the Market for New York City Apartments

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Figure 6: Scotland’s Price Floor on Alcohol

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Figure 7: Zoning Laws and the Seattle Housing Market

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The Spectrum of Market Power

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Your Firm’s Demand Curve Depends on the Type of Competition You Face

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Estimating Zany Brainy’s Firm Demand Curve

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Discover Your Firm’s Marginal Revenue Curve

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| Your Marginal Revenue Curve

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Figure 6: Setting Prices and Quantities with Market Power

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Comparing Market Power and Perfect Competition

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How Competitors Responded to News the Merger Between US Airways and American Airlines Might Be Blocked

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accounting profit

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economic profit—which is total revenue less both the explicit financial costs that accountants focus on and the implicit opportunity cost of the entrepreneur’s time and money:

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Two Perspectives on Profit

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average revenue

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average cost

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| Average Cost Curve

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Your profit margin per unit is the price less average cost.

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Profit Margins

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Figure 4: Entry and Exit Shift Your Firm’s Demand Curve

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Economic Profits Tend to Zero

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New rivals will continue to enter as long as economic profits are positive, with each additional competitor pushing profits down a bit further.

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Managers will keep leaving as long as economic profits remain negative, with each additional exit improving the profitability of those that remain.

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In the long run with free entry (and exit), price equals average cost.

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Free Entry Continues Until Price Equals Average Cost

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To see why the two curves have to just touch, realize that if any part of the demand curve lies above average costs, there’s a profit opportunity—because price exceeds average costs. Free entry will continue until this opportunity is eliminated. And, if the demand curve lies entirely below average costs, then incumbent businesses must be making losses because price is always below average costs. Incumbent businesses will exit until these losses are eliminated. When the two curves touch, the best a company can do is make zero economic profits, which is a long-run equilibrium, because it’ll lead the industry to neither expand (through entry) nor contract (through exit).

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