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Chapter 4

Econ 1B03 - Chapter 4 Part 2.docx

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Hannah Holmes

Richard Damra Monday, January 21, 2013 Econ 1B03 - Chapter 4 Supply and Demand Shift Factors for Demand  Consumer Income  As income increases, the demand for a normal good will: o Increase and demand curve shifts to the right  As income increases, the demand for an inferior good will: o Decrease, demand curve shifts left   Richard Damra Monday, January 21, 2013 Price of Related Goods  If 2 goods are substitutes: if the price of Good # 1 increase, the Qd of Good #1 decrease and the demand for Good # 2 will increase (e.g Coke and Pepsi)  If the 2 goods are compliments: if the price of Good # 1 increases, the Qd of Good # 1 decreases and the demand for Good # 2 will also go down (e.g Gas and automobile) Increase in the price of a Substitute  Change in Qd = no shift  Change in Demand = curve shift  Changes in expectations and tastes will shift demand accordingly. Supply  Quantity supplied, Qs: amount of good that sellers are willing and able to sell  When the price of a good increases, ceteris paribus, selling that good becomes more profitable and firms will want to offer more for sale.  Price and Qs are positively related  As Price increases, Quantity supplied (Qs) increase. The Law of Supply  Other things being equal (ceteris paribus), the quantity supplied of a good rises when the price of the good rises. Other Determinants of Supply  Input Prices: When the price of an input into production (like labour costs, raw materials, energy etc) producing the good becomes less profitable and firms will offer fewer goods for sale at any price  if the cost of production increase, supply will decrease. Richard Damra Monday, January 21, 2013  Technology: advances in which reduce production costs, will increase supply  Expectations: if a firm expects the selling price to increase in the future, it will hold off selling now and current supply will decrease.  Number of Firms: more firms means more supply. 
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