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Demand and Supply

Having grasped the tools and concepts presented in this reading, the reader should also be able to understand many important economic relations and facts and be able to answer questions, such as:

  • Why do consumers usually buy more when the price falls? Is it irrational to violate this “law of demand”?

  • What are appropriate measures of how sensitive the quantity demanded or supplied is to changes in price, income, and prices of other goods? What affects those sensitivities?

  • If a firm lowers its price, will its total revenue also fall? Are there conditions under which revenue might rise as price falls and what are those? Why?

  • What is an appropriate measure of the total value consumers or producers receive from the opportunity to buy and sell goods and services in a free market? How might government intervention reduce that value, and what is an appropriate measure of that loss?

  • What tools are available that help us frame the trade-offs that consumers and investors face as they must give up one opportunity to pursue another?

  • Is it reasonable to expect markets to converge to an equilibrium price? What are the conditions that would make that equilibrium stable or unstable in response to external shocks?

  • How do different types of auctions affect price discovery?

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