ECON 208 Chapter Notes - Chapter 3: Microeconomics, Exogeny, Excess Supply

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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
Whether quantity demanded rises/falls depends on the relative magnitudes of these 2 changes
3.2 Supply
Quantity Supplied
Quantity supplied: the amount of a commodity that producers want to sell during some time
period; it is a flow (t is so much per unit of time); the amount that producers are willing to offer
for sale
General rule, any event that makes production of a specific product more profitable will lead
firms to supply more of it.
The quantity supplied of a product influenced by: Product’s own price, Prices of input,
Technology, Some government taxes or subsidies, Prices of other products, Number of suppliers
Ceteris paribus assumption used here too to study the influence of the variables one at a time

Document Summary

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, Ceteris paribus holding all other variable constant. 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.