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Lecture 4

Lecture Four: Demand and Supply

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York University
ECON 1000
George Georgopoulos

Lecture Four: Demand and Supply September 22, 2011 Markets and Prices Market - any arrangement that enables buyers and sellers to get information and so business with each other. Competitive Market - a market that has many buyers and many sellers so no single buyer or seller can influence the price. The Money Price - the amount of money needed to buy the good. Relative Price - the ration of it money price to the money price of the next best alternative good (aka its opportunity cost) Demand If you demand something then you 1. want it 2. can afford it 3. have made a definite plan to buy it Wants - the unlimited desires of wishes people have for goods and services. Demand reflects a decision about which wants to satisfy. Quantity demanded - the amount that consumers plan to buy during a particular time period and at a particular price of a certain good or service. The Law of Demand Other things remaining the same, the higher the price of a good, the smaller is the quantity demanded, and the lower the price of the good, the larger is the quantity demanded. The law of demand results from - Substitution effect - Income effect Substitution Effect When the relative price (opportunity costs) of a good or service rises, people seek substitutes for it, so the quantity of the good or service decreases. Income Effect When the price of a good or service rises relative to income, people cannot afford all the thing they previously bough, so the quantity demanded of the good or service decreases. Demand Curve and Demand Schedule The term demand refers to an entire relationship between the price of the good and the quantity demanded of the good. A Demand Curve shows the relationship between the quantity demanded of a good and its price when all other influences of consumers planned purchases remain the same Example There is a demand curve for energy bars. A rise in the price, other things remaining the same, brings a decrease in the quantity demanded and a movement along the demand curve. Willingness and Ability to Pay A demand curve is also a willingness-and-ability-to-pay curve. The smaller the quantity available, the higher is the price that someone is wiling to pay for another unity. Willingness to pay measures the marginal benefit. A Change in Demand When some influence on buying plans other than he price of the good changes, there is a change in demand for that good. The quantity of the good that people plan o buy changes at each and every price, so there is a new demand curve. When demand increases, the curve shifts to the right. When demand decreases, the curve shifts to the left. Factors that Change Demand The prices of related goods Substitute - a good that can be used in place of another good Complement - a good that is used in conjunction with another good When the price of s substitute goes up, or the price of a complement falls, the demand would increase. When the price of a substitute drops, or the price of a complement increases, the demand would decrease. Expected future prices If the price of a good is expected to rise in the future, current demand for the good increases and the curve shifts rightward. Income When income increases, consumers buy more of most goods and the demand curve shifts rightward. Normal good - demand increases and income increases Neutral good - demand stays the same regardless of the increase in income Inferior good - a good for which demand decreases and income increases Expected future income and credit When income is expected to increase in the future or when credit is easy to obtain, the demand might increase now Population The greater the population, the greater is the demand for all goo
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