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Chapter 4

Economics Chapter 4.pdf

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Department
Economics
Course
ECN 104
Professor
Tsogbadral Galaabaatar
Semester
Winter

Description
Economics Chapter 4 The market forces of supply and demand Market: is a group of buyers and sellers of a particular product Competitive market: is one with many buyers and sellers, each has negligible effect on price Quantity Demanded: The amount of good that buyers are willing and able to purchase Law of demand: the claim that, the quantity demanded of a good falls when the price of good rises other things equal, Perfectly Competitive market: All goods are exactly the same, buyers and sellers so numerous that no one can affect market price- each is a Price Taker Demand Schedule: A table that shows the relationship between the price of a good and the quantity demanded Ex. Helen’s demand of lattes, notice that Helen’s preferences obey the law of demand Market demand Vs. Individual demand: The quantity demanded in the market is the sum of the quantities demanded by all buyers at each price. Suppose Helen and Ken are the only two buyers in the Latte market. (Q = quantity demanded) Demand Curve: A graph of the relationship between the price of a good and the quantity demanded. The demand curve shows how price affects quantity demanded, other things being equal. These “other things” are non-price determinants of demand (i.e., things that determine buyers’ demand for a good, other than the good’s price). Changes in them shift the D curve… Demand curve shifter: # of buyers Increase in # of buyers increases quantity demanded at each price, shifts D curve to the right. Demand curve shifter: Income Demand 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. (Demand for an inferior good is negatively related to income. An increase in income shifts D curves for inferior goods to the left.) Normal good: A good for which, other things equal, an increase in income leads to an increase in demand Inferior Good: A good for which, other things equal, an increase in income leads to an decrease in demand Demand curve Shifters: Prices of related goods Substitutes: two goods for which an increase in the price of one leads to an increase in the demand for the other Example: pizza and hamburgers. An increase in the price of pizza increases demand for hamburgers, shifting hamburger demand curve to the right. Other examples: Coke and Pepsi, laptops and desktop computers, CDs and music downloads Complements: two goods, for which an increase in the price of one leads to a decrease in the demand for the other Example: computers and software. If price of computers rises, people buy fewer computers, and therefore less software. Software demand curve shifts left. Other examples: college tuition and textbooks, bagels and cream cheese, eggs and bacon Demand Curve Shifters: Tastes Anything that causes a shift in tastes toward a good will increase demand for that good and shift its D curve to the right. Example: The Atkins diet became popular in the ’90s, caused an increase in demand for eggs, shifted the egg demand curve to the right. Demand Curve Shifters: Expectations Summary: Variables the influence Buyers Expectations affect consumers’ buying decisions. Examples: If people expect their incomes to rise, their demand for meals at expensive restaurants may increase now. If the economy sours and people worry about their future job security, demand for new autos may fall now. Exercise 1 Draw a demand curve for music downloads. What happens to it in each of the following scenarios? Why? A.The price of iPods falls B.The price of music downloads falls C.The price of CDs falls Quantity supplied: The amount of a good that sellers are willing and able to sell Law of supply: The claim that, other things equal, the quantity supplied of good rises when the process of the good rises Supply schedule: A table that shows the relationship between the price of a good and the quantity supplied Ex. Starbucks supply of lattes, notice the Starbucks supply schedule obeys the law of supply Market Supply vs. individual supply The quantity supplied in the market is the sum of the quantities supplied by all sellers at each price. s Suppose Starbucks and Jitters are the only two sellers in this market. (Q = quantity supplied) The market Supply Curve Supply curve Shifters: Supply curve: a graph of the relationship between the price of a good and the quantity supplied. The supply curve shows how price affects quantity supplied, other things being equal. These “other things” are non-price determinants of supply. Changes in them shift the S curve…
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