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Lecture 3

Econ 103 Lecture 3 Jan 14th.doc

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ECON 103
Iryna Dudnyk

Econ 103 Lecture 3, week 2 Chapter 4 The law of Demand Review: -MV = how much one is willing to sacrifice (pay) for additional unit. -P consumer/buyer gain from purchase unit. What determines consumption of a good? -Preferences = MV - take as given -Budget = income (M) Price P1 and P2 -nominal M and P's - measured in dollars. -consumption choice is determined by: -real income \ }-----> measured in units of goods -relative prices / Example: Country A: -M = 100 -P1 (jeans) = 100 -P2 (t-shirts) = 25 -Real income = M/P1 = 100/100 = 1 jeans M/P2 = 100/25 = 2 t-shirts Country B: -M = 300 -P1 = 300 -P2 = 75 -M/P1 = 300/300 = 1 jeans -M/P2 = 300/75 = 4 t-shirts -Relative price of good 1 - how many units of good 2 consumer must "pay" for 1 more unit of good 1. Relative P of jeans = 4 t-shirts =P1/P2 Relative P of t-shirts = P2/P1 =1/4 jeans *when real income (M) and relative prices are the same, the consumer will make the same choice.* -when relative prices change, consumers change quantities of good they are willing to buy. Demand Curve ******check notebook for graph****** ( 1 ) -Quantity demanded = amount of good consumer is willing to buy at certain price. -Demand (curve) = all price - quantity combinations; how many units of the good consumer is willing to buy at each price. *Demand = entire curve. *Quantity demanded = one point on demand curve. -> when good's P changes, it moves along the same D curve - change in Q demanded. ** NOT a change in Demand, we are staying on the same curve. - Along (the same) D curve: -only good's own P and Q change. -income, O's of related goods and preferences are held fixed. -> when these change, whole curve shifts - The Law of Demand - other things equal, there is a negative relati
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