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Final

ECON 2010 Study Guide - Final Guide: Fiscal Policy, Money Supply, Human Capital


Department
Economics
Course Code
ECON 2010
Professor
All
Study Guide
Final

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Econ 2010 12/11/2013
Chapter 3
Vocab:
Perfectly competitive market- a market that meets the conditions of (1) many buyers and sellers,
(2) all firms selling identical products, and (3) no barriers to new firms entering the market
The Demand Side of the Market
Demand Schedule A table showing the relationship between the price of a product and the quantity of
the product demanded.
Quantity Demanded- the amount of a good or service that a consumer is willing and able to purchase
at a given price
Demand Curve- a curve that shows the relationship between the price of a product and the quantity of
the product demanded on a graph
Market Demand- the demand by all the consumers of a given good or service
The Law of Demand
Law of demand- the rule that, holding everything else constant when the price of a product falls, the
quantity demanded of the product will increase, and when the price of product rises, the quantity demanded
of the product will decrease
What Explains the Law of Demand?
-Both the substitution effect and income effect happen simultaneously
Substitution effect- the change in the quantity demanded of a good that results from a change in
price, making the good more or less expensive relative to other goods that are substitutes
Example: when the price of energy drinks falls, consumers will substitute buying energy drinks instead of
buying other goods, such as sports drinks or coffee.
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 consumers’ purchasing power
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Purchasing power is the quantity of goods a consumer can buy with a fixed amount of income
Holding Everything Else Constant: The Ceteris Paribus Condition
Ceteris paribus (“all else equal”) condition- the requirement that when analyzing the
relationship between two variable- such as price and quantity demanded- other variables must be held
constant
A shift of demand curve is an increase or a decrease in demand. A movement along a demand curve is an
increase or decrease in the quantity demanded.
Variables that Shift Market Demand
Income- if income increases the demand curve moves to the right, decreases moves to the left
Normal good- a good for which the demand increases as income rises and decreases as income falls
ex. Shrimp and prime rib
Inferior good- a good for which the demand increases as income falls and decreases as income rises
ex. Hot dogs and tuna
Prices of related goods
Substitutes- Goods and services that can be used for the same purpose
Ex. Coffee and Energy Drinks. If Coffee price goes down the demand curve for energy drinks shifts to the
left. If the price of coffee goes up the demand curve for energy drinks increases and shifts to the right.
Complements- goods and services that are used together
Ex. Hot dog buns and hot dogs. If the price for hot dog buns go down the demand curve for hot dogs with
shift to the right. If the price for hot dog buns go up, the demand curve for hot dogs will shift to the left.
Tastes
If consumers taste for a product increases, the demand curve will shift to the right, and when consumers
taste for a product decreases the demand curve will shift to the left.
Population and demographics
Demographics- the characteristics of a population with respect to age, race, and gender
Ex. More Hispanics means an increase in demand for Spanish goods causing demand curve to shift to the
right.
Expected future prices
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Ex. If consumers believe that house prices will fall in the near future the demand curve for the current
economic state will shift to the left.
A Change in Demand versus a Change in Quantity Demanded
A change in demand refers to a shift of the demand curve, which happens when variables other than price
affect the customers. A change in quantity demanded refers to a movement along the demand curve as a
result in a change in the product’s price. Table 3-1 pg 72
The Supply Side of the Market
Quantity supplied- the amount of a good or service that a firm is willing and able to supply at a given
time
Supply Schedules and Supply Curves
Supply schedule- a table that shows the relationship between the price of a product and the quantity
of the product supplied
Supply curve- a curve that shows the relationship between the price of a product and the quantity of
the product supplied
The Law of Supply
Law of supply- the rule that, holding everything else constant, increases in price cause increases in the
quantity supplied, and decreases in price cause decreases in the quantity supplied
Variables that Shift Market Supply
Prices of inputs
The change in the price of an input which is anything that is used in the production of a good or service. Ex.
Price of an ingredient in an energy drink rises, the cost of production rises, and supply curve will shift to the
left.
Technological Change
Technological change- a positive or negative change in the ability of a firm to produce a given level
of output with a given quantity of inputs
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