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Simon Fraser University
Business Administration
BUS 207
Allan Matadeen

Chapter 2 Market forces: Demand and Supply Demand Market demand curve A curve indicating the total quantity of a good all consumers are willing and able to purchase at each possible price, holding the prices of related goods, income, advertising, and other variables constant. Demand shifters Variables other than the price of a good that influence demand are known as demand shifters. For a demand curve, the movement along the demand curve is called change in quantity demanded. Whenever advertising, income, or the price of related goods changes, it leads to a change in demand; the position of the entire demand curve shifts. A rightward shift in demand curve is called an increase in demand, since more of the good is demanded at each price. A leftward shift in the demand curve is called a decrease in demand. Income Whether an increase in income shifts the demand curve to the right or to the left depends on the nature of consumer consumption patterns. Accordingly, economists distinguish between two types of good: normal and inferior goods. A good whose demand increases when consumer incomes rise is called a normal good. Changes in income tend to have profound effects on the demand for durable goods, and these effects are typically amplified in developing countries and rural areas. Inferior good is a case of a increase in income reduces the demand for a good. Example like Bologna, bus travel, and “generic” jeans are inferior goods. Price of related goods www.notesolution.com Substitutes: Goods for which an increase (decrease) in the price of one good leads to an increase (decrease) in the demand for the other good. Like Coke and Pepsi. Substitutes need not serve the same function; for example, automobiles and housing could be substitutes. Complements: Goods for which an increase (decrease) in the price of one good leads to decrease (increase) in the demand of the other good. Advertising and consumer tastes Advertising often provides consumers with information about the existence or quality of a product, which in turn induces more consumers to buy the product. These types of advertising message are known as informative advertising. Advertising can also influence demand by altering the underlying tastes of consumers. For example, advertising that promotes the latest fad in clothing may increase the demand for a specific fashion item by making consumers perceive it as “the” thing to buy. These types of advertising message are known as persuasive advertising. Population The demand for a product is also influenced by changes in the size and composition of the population. Generally, as the population rises, more and more individuals wish to buy a given product. Consumer Expectations If consumers expect future prices to be higher, they will substitute current purchase for future purchases. This behavior is called stockpiling and generally occurs when products are durable in nature. The current demand for a perishable product such as bananas generally is not affected by expectations of higher future prices. Other Factors Health scare-cigarette; baby birth-diapers The demand function www.notesolution.com Demand function: a function that describes the how much of a good will be purchased at alternative prices of that good and related goods, alternative income levels, and alternative values of other variables affecting demand. Linear demand function: It is a representation of the demand function in which the demand for a given good is a linear function of prices, income levels, and other variables influencing demand. Consumer surplus It is the value consumers get from a good but do not have to pay for. More generally, consumer surplus is the area above the price paid for a good but below the demand curve. The problem 2-2 is a good example in illustrating this. Supply Market supply curve A curve indicating the total quantity of a good that all producers in a competitive market would produce at each price, holding input prices, technology, and other variables affecting supply constant. Changes in the price of a good lead to a change in quantity supplied of that good. This corresponds to a movement along a given supply curve. Supply shifters Variables that affect the position of the supply curve are called supply shifters, and they include the prices of inputs, the level of technology, the number of firms in the market, taxes, and producer expectations; changes in these variables will make supply curve shift, and these shifts are called c
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