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Lecture 3

ECON 101 Lecture 3: ECON 101 - Chapter 3 Notes
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4 Pages
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Department
Economics
Course Code
ECON 101
Professor
Noriko Ozawa

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Tuesday, September 27, 2016 ECON 101 Lecture 3: Where Prices Come From - The Interaction of Supply and Demand 3.1 The Demand Side of the Market Definitions: • Demand Schedules - a table that shows the relationship between the price and the quantity of the product demanded • Demand Curve - a curve that shows the relationship between the price and the quantity of the product demanded • Market Demand - the demand by all the consumers of a given good or service • The Law of Demand: when the price of a product falls, the quantity demanded of the product will increase • Explanation: 1. The Substitution Effect - the change in the quantity demanded of a good that results from a change in the relative price 2. The Income Effect - the change in the quantity demanded of a good that results from the effect of a change in the good’s price on consumer’s purchasing power - NOTE: Ceteris Paribus (all else equal) - when analyzing the relationship between two variables, all other variables must be held constant • Variables That Shift Market Demand: - Income ; Price of related goods ; Tastes ; Population and Demographics ; Expectation ( all Non-price Determinants of Demand) • Effect of Change in Income on Demand: • Normal Good - a good for which the demand increases as income rises and decreases as income falls (e.g. vacations, single-malt scotch) • Inferior Good - a good for which the demand increases as income falls and decreases as income rises (e.g. ground beef, public transportation, Kraft Dinner) 1 Tuesday, September 27, 2016 • Effect of Change in Price of a Related Good on Demand: • Substitutes - a good that can be used in place of another good - a fall in the price of a substitute decreases the demand for the good - e.g. Pepsi vs. Coke ; Chocolate vs. Ice Cream Complements - a good that is used in conjunction with another good • - a fall in the price of a complement increases the demand for the good
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