Changes

Building on last week's class, we can now state the three most basic principles of economics with respect to price:

Building on last week's class, we can now state the three most basic principles of economics with respect to price:

*A fall in price tends to increase the quantity demanded by the public, and a rise in price tends to decrease the quantity demanded. '''LOWER PRICE MEANS HIGHER DEMAND''' (and higher price means lower demand).  This is known as the '''Law of Demand''': the demand changes inversely with price.

*A fall in price tends to increase the quantity demanded by the public, and a rise in price tends to decrease the quantity demanded. '''LOWER PRICE MEANS HIGHER QUANTITY DEMANDED''' (and higher price means a lower quantity demanded).  This is known as the '''Law of Demand''': the quantity demanded changes inversely with price.

*When demand exceeds supply at a given price, the price tends to rise as sellers take advantage of the high demand by increasing price.  Similarly, when the supply exceeds the demand, the price tends to decrease as sellers try to sell their unsold goods.     

*When the quantity demanded exceeds the quantity supplied at a given price, the price tends to rise as sellers take advantage of the high quantity demanded by increasing price.  Similarly, when the quantity supplied exceeds the quantity demanded, the price tends to decrease as sellers try to sell their unsold goods.     

*Price tends to move towards the amount at which the quantity in demand is equal to the quantity in supply: '''EQUILIBRIUM IS WHERE SUPPLY EQUALS DEMAND'''.

*Price tends to move towards the amount at which the quantity in demand is equal to the quantity in supply: '''EQUILIBRIUM IS WHERE QUANTITY SUPPLIED EQUALS QUANTITY DEMANDED'''.

Many of the problems in this course, and in any economics course, can be answered just by remembering and applying the above three principles.  The equilibrium price is the result of a "tug of war" between the buyers and sellers:  the buyers (the public) want to pay less (a lower price), and the sellers want to receive more (a higher price).  These opposing forces are constantly working to keep the price at equilibrium.

Many of the problems in this course, and in any economics course, can be answered just by remembering and applying the above three principles.  The equilibrium price is the result of a "tug of war" between the buyers and sellers:  the buyers (the public) want to pay less (a lower price), and the sellers want to receive more (a higher price).  These opposing forces are constantly working to keep the price at equilibrium.