ECN 204 Chapter Notes - Chapter 4: Economic Equilibrium, Demand Curve, Inferior Good

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22 Oct 2012
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ECN204 Notes Chapter 4
Demand Curve Shifters
oThe demand curve shows how price affects quantity demanded, other
things being equal. Changes in theseother things” shift the D Curve
Variable A change in this variable…
Price …causes a movement along the D Curve
#of buyers …shifts the D Curve
Income …shifts the D Curve
Price of related goods …shifts the D Curve
Tastes …shifts the D Curve
Expectations …shifts the D Curve
Demand Curve Shifters: Income
oDemand for a normal good is positively related to income
Increase in income causes increase in quantity demanded at each
price, shifts D Curve to the right
oDemand for an inferior good is negatively related to income. An
increase in income shifts D curves for inferior goods to the left
Demand Curve Shifters: Prices of Related Goods
oSubstitutes – two goods are substitutes if an increase in the price of one
causes an increase in demand for the other (e.g., Coke and Pepsi)
oComplements – two goods are complements if an increase in the price of
one causes a fall in demand for the other (e.g., computers and software)
Demand Curve Shifters: Tastes
oAnything that causes a shift in tastes toward a good will increase
demand for that good and shift its D Curve to the right
Chapter Summary
oA competitive market has many buyers and sellers, each of whom has
little or no influence on the market price.
oEconomists use the supply and demand model to analyze competitive
markets.
oThe downward-sloping demand curve reflects the Law of Demand, which
states that the quantity that buyers demand of a good depends
negatively on the good’s price.
oBesides price, demand depends on buyers’ incomes, tastes,
expectations, the prices of substitutes and complements, and number of
buyers. If one of these factors change, the D Curve shifts
oThe upward-sloping supply curve reflects the Law of Supply, which
states that the quantity sellers supply depends positively on the good’s
price
oOther determinants of supply include input prices, technology,
expectations, and the # of sellers. Changes in these factors shift the S
Curve
oThe intersection of S and D Curves determines the market equilibrium.
At the equilibrium price, quantity supplied equals quantity demanded
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