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Chapter 4

Econ 1B03 Chapter 4 Part 1.docx

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Department
Economics
Course
ECON 1B03
Professor
Hannah Holmes
Semester
Winter

Description
Richard Damra Thursday, January 17, 2013 Econ 1B03 – Chapter 4 Supply and Demand Markets  Market: group of buyer and sellers of a particular good or service  The terms supply and demand refer to the behavior of people as they interact with one another in markets.  Market demand: refers to the sum of all individual demands for a particular good or service  Market supply: refers to the sum of all individual supplies of a particular good or service.  There are different types of market structures o Competitive market: so many buyers and sellers that each one has a negligible (if any) impact on market price o Perfectly competitive market: all goods are homogenous (identical) o Since no buyer or seller can influence price, each is a price taker. We will assume markets are perfectly competitive Demand  Quantity demanded, Qd: amount of good or service that consumers are willing and able to buy at a given price, P.  When the price of a good increase, you buy less of that good  We say that price and Qd are negatively related  As Price increase Qd decrease  Law of Demand o Other things being equal (ceteris paribus), when the price of a good rises, the quantity demanded of that good falls. Other Determinants of Demand  Income: o Normal good: When income increase and you buy more of that good (or if income decrease you buy less) o Inferior good: When income increase and you buy less of that good (or if income decrease you buy more)  Most goods are normal goods. Examples of inferior goods include Kraft Dinner (as your income increases, you don’t have to eat KD anymore- you can afford steak) and bus rides (as income increases, you can take a cab or buy a car). Prices of related goods  1. Substitutes: if Price of a good increases and the demand of another good then increases, these are substitutes Richard Damra Thursday, Janua
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