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Chapter 3

Chapter 3

Course Code
ECN 104
Halis Yildiz

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Chapter 3: Demand, Supply and Market Equilibrium
3.1 Demand
Demand: a schedule/curve that shows the various amounts of product consumers are willing & able to
purchase at each of a series of possible prices, during some specified period of time
Law of demand: all else equal, as price falls, quantity demanded rises; prices rises, quantity demanded
Downward slope of demand curve reflects law of demand
Diminishing marginal utility: as consumer increases the consumption of a good/service, the
marginal utility obtained from each additional unit of the good/service decreases (Ex. 2nd Big
Mac will yield less satisfaction to consumer than the 1st, and 3rd still less than 2nd)
Income effect: change in price of product changes a consumers real income (purchasing power)
and thus quantity of the product purchased
Substitution effect: change In price of a product changes the relative expensiveness of that
good and hence changes willingness to buy it rather than other goods
Demand curve: illustrating the inverse (negative) relationship between the quantity demanded of a
good/service and its prince, other things equal (MB curve)
Horizontal axis: quantity demanded; Vertical axis: price
Market demand: adding quantities demand by all consumers at each possible price

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Determinants of Demand
Factors other than price that determine the quantities of a good/service
Price is the most important influence on the amount of any product purchased
Change in price yields a movement along the demand curve & change in quantity demanded
1.Tastes (preferences)
Change makes product more desirable – more of it will be demanded at each price,
new products may affect consumers’ taste
Demand INCREASE D curve shifts RIGHT (favourable)
Demand DECREASE D curve shifts LEFT (unfavourable)

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2.Number of buyers
Increase # of buyers in market increase in product demand
Decrease # of buyers in market decrease in product demand
normal goods: products for which demand varies directly with money income
income increases demand increases
income decreases demand decreases
inferior goods: goods for which demand varies inversely with the income
income increases demand decreases
income decreases demand increases
4.Prices of related goods
Substitute goods: products/services that can be used in place of each other
Price increase of A increase demand for B
Price decrease of A decrease demand for B
Complementary goods: products/services that are used together
Price increase of A decrease demand for B
Price decrease of A increase demand for B
Unrelated goods: goods not related to one another (independent goods) change in price
doesn’t affect demand for the other
5.Consumer expectations
Higher future prices increase in current demand
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