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ECON 311 Jan 11.docx

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University of British Columbia
ECON 311
Ratna Shrestha

Chapter 3 Demand, Supply, and Price. 3.1 Demand- Quantity Demanded. - The Total amount that consumers desire to purchase in some time period is called the quantity demanded of a product. - Quantity bought (or exchanged) refers to actual purchases. - Quantity demanded is a flow, as opposed to a stock. Extensions in Theory 3-1. The Distinction between stocks and flows Quantity Demanded and Price - A basic hypothesis is that – ceteris paribus- the price of a product and the quantity demanded are negatively related. When the price of a product increases, its quantity demanded decreases- the law of demand - Why? These are usually several products that can satisfy any given want or desire. - A reduction in the price of a product means that the specific desire can now be satisfied more cheaply by buying more of that product. - Similarly, when price of a product increases, consumers switch to other relatively cheaper products. Demand Schedules and Demand Curves - When the price of carrots decreases from $100 to $80, quantity demanded increase from 40 to 50- there is a movement along the curve. - A change in variables other than price will shift the demand curve to a new position. - consumers’ income - prices of other products - population - expectations about the future price or income - tastes Normal good: when your income increase, desire to purchase also increase Inferior good: When your income increases, desire to purchase decreases (EX: bus ride, cheap wine) Determinant of Demand: Income - As income increases the demand for a normal good increases but for inferior goods decreases. - Examples? - In Japan, Ashahi Brewery did well during recession. What is the possible implication of this? - In 2008, Melbourne newspaper reported that local book retailers were faring better this Christmas than the last. Implication? Possibly good are inferior goods Page 1 of 6 - Determinant of Demand: Prices of Related Goods. - When the fall in price of one good reduces the demand for another good (Shift of demand curve to the left), the two goods are substitutes. - Examples? In the reverse case they are complements. - A rightward shift indicates an increase in demand. - A leftward shift indicates a decrease in demand. - A change in demand is a change in quantity demanded at every price - - a shift of the entire curve - A change in quantity demanded refers to a movement from one point on a demand curve to another point, either on the same demand curve or on a new one (but at different level of price). - Page 2 of 6 3,2 Supply - Quantity supplied - quantity supplied is the amount that firms are willing to offer for sale at any given price. It is not necessarily the quantity actually sold - Ceteris Paribusm the price of a product and the quantity supplied are positively related- the law of supply. - Why? If the price of a particular product rises, then the production and sale of this product is more profitable. - Supply curves also reflect the minimum price firms are willing to accept to supply that particular unit of product. - Supply schedule and supply curves - A change in any variable other than price will shift the supply curve to a new position. The following variables will shift the supply curve. o Prices of inputs o Technology o Government taxes or subsidies o Prices of other related products o Number of suppliers o - A change in supply is a change in the quantity that will be supplied at every price – a shift of the entire curve. - Whereas a change in quantity supplied refers to a movement from one point on a supply curve to another p
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