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ECON 208 (113)
Chapter 3

Chapter 3 Demand, Supply, and Price.docx

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Department
Economics (Arts)
Course
ECON 208
Professor
Mayssun El- Attar Vilalta
Semester
Fall

Description
Chapter 3 Demand, Supply, and Price 3.1 Demand Quantity Demand  Quantity demand: the amount of a good or service that consumers want to purchase during some time period o Quantity demanded is a desired quantity (when consumers faced with a particular price of the product, other products’ prices, their incomes, their tastes, etc); can be different from how much is actually purchased (quantity bought/exchanged = actual purchases) o Quantity demanded refers to a flow of purchases. Must be expressed as so much per period of time (50,000 TVs demanded per year)  Total amount of a product that consumers in the relevant market want to buy in a given time period is influenced by: Product’s own price, Consumer’s income, Prices of other products, Tastes, Population, Expectations about the future  Ceteris paribus – holding all other variable constant. Other things being equal. Other things given. ( ex: price of eggs on the quantity of eggs demanded, c.p., they refer to what a change in the price of eggs would do to the quantity of eggs demanded if all other variables that influence the demand for eggs didn’t change) Quantity Demanded and Price  A basic economic hypothesis is that the price of a product and the quantity demanded are related negatively, other things being equal. That is, the lower the price, the higher the quantity demanded; the higher the price, the lower the quantity demanded.  Alfred Marshall (1842 – 1924) – British economist , called this fundamental relation the “law of demand”  Products satisfy desires and needs and there is usually more than one product that can.  When one products price goes up, consumers switch wholly or partly to other products, or some will still buy the same amount as before; but net effect is lower demand.  When price goes down, higher demand for it, and consumers will buy less of other more expensive similar products whose prices didn’t fall b/c they’re more expensive relative to the product in question Demand Schedules and Demand Curves  Demand Schedule: a table showing the relationship between quantity demanded and the price of a commodity, other things being equal  Demand Curve: the graphical representation of the relationship between quantity demanded and the price of a commodity, other things being equal; shows the quantity that consumer would like to buy at each price  the negative slope of the curve indicates that the quantity demanded increases as the price falls  When economists talk about demand, they’re referring to the entire demand curve – to the relationship between desired purchases and all the possible prices of the product  Demand: the entire relationship between the quantity of a commodity that buyers want to purchase and the price of that commodity, other things being equal  a single point on a demand schedule/curve is the quantity demanded at that point Shifts in the Demand Curve  a rise in income that causes more to be demanded at each price shifts the demand curve to the right  The demand curve is drawn with the assumption that everything except the product’s own price is held constant. A change in any of the variables previously held constant will shift the demand curve to a new position.  More is desired at each price – the demand curve shifts rightward so that each price corresponds to a higher quantity than before  Less desired at each price – the demand curve shifts leftward so that each price corresponds to a lower quantity than it did before 1) Consumer’s Income  If avg income rises, consumers as a group can be expected to desire more of most products, other things being equal  Normal goods: for which the quantity demanded increases when income rises (shift right)  Inferior goods: for which the quantity demanded decreases when income rises (shift left)  Change in the distribution of income = changes in demand = increase in demand for the products bought by most consumers whose incomes increase and a decrease in the demand for products bought by most consumers whose incomes decrease  Govt increases child tax credit and raises basic tax rates – income transferred from households w/o children to households with children – demand for products more heavily bought by persons w/o children will decline, while demands for product more heavily bought by households w/ children will increase 2) Prices of other Goods  Negative slope of a product’s demand curve occurs b/c the lower its price, the cheaper the product becomes relative to other product that can satisfy the same needs/desires  Substitutes in consumption: goods that can be used in place of another good to satisfy similar needs or desires  A rise in the price of a substitute for a product shifts the demand curve for the product right – more demanded at each price  Complements in consumption: goods that tend to be consumed together (cars/gas)  A fall in the price of one will increase the quantity demanded of both products = a fall in the price of a complement for a product will shift the product’s demand curve right 3) Tastes  Change in taste may be long-lasting (typewriters to computers) or short-lived (video games)  A change in tastes in favour of a product shifts the demand curve right (against/left) 4) Population  If there is an increase in population with purchasing power, the demands for all the products purchased by the new ppl will rise  increase in pop will shift the demand curves for most products to the right 5) Expectations about the Future  increase in future prices of houses – increase demand today and make purchase before price^ Movements Along the Curve Vs. Shifts of the Whole Curve  rising price with rising demand – shift in demand curve o rise in pop and income shifts demand curve to right – raise price  ^price with declining demand – movement along the new demand curve in response to price change – reflects a change between two specific quantities demanded, one before the price increase and one afterwards o Rising price causing each to cut back – cutback represented by upward movement to left along the new demand curve  Change in demand: a change in the quantity demanded at each possible price of the commodity, represented by a shift in the whole demand curve.  Change in quantity demanded: a change in the specific quantity of the good demanded, represented by a change from one point on a demand curve to another point, either on the original demand curve or on a new one  A change in the quantity demanded can result from a shift in the demand curve with the price constant; from movement along a given demand curve due to a change in the price; or from a combination of the two  At a given price, an increase in demand (means the demand curve shifts to the right) causes an increase in quantity demanded, whereas a decrease in demand (means the demand curve shifts to the left) causes a decrease in quantity demanded  A movement down and to the right along a demand curve represents an increase in quantity demanded; a movement up and to the left along a demand curve represents a decrease in quantity demanded  When there is a change in demand and a change in the price, the overall change in quantity demanded is the net effect of the shift in the demand curve and the movement along the new demanded curve (p.57 figure)  Increase in demand causes Rightward shift of whole demand curve + upward movement to left along new demand curve caused by increase in price  Increase in demand causes an increase in quantity demanded at the initial price, whereas the movement along the new demand curve causes a decrease in the quantity demanded
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