Chapter 3 Vocab and Notes
SchoolSimon Fraser University
Course CodeBUS 207
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DETERMINANTS OF DEMAND
The shows, in equation form, the relationship between the quantity sold of a
good or service and one or more variables.
-?The demand equation can be used to test the effect of changes in any of the
Starting from an initial price, by varying the price up or down, we move respectively up
and down) the demand curve.
-?A higher price means lower sales and a lower price means higher sales.
If there is a change in one of the other factors, then this mm.
The m is a key determinant of demand.
-?Also important, is the m of the potential purchasers of the good or
A product is called a ^ if an increase in income raises its sales.
-?For any normal good, sales vary directly with income (the coefficient on income in
the demand equation is positive).
-?Most goods and services are normal (any increase in consumer income is spread over
a wide variety of goods and services).
For j ^, an increase in income causes a reduction in spending.
A third set of factors affecting demand are the prices of and mgoods.
A !^ competes with and can substitute for the good in question.
-?An increase in the price of the substitute good or service causes an increase in
demand for the good in question.
A pair of goods is if an increase in demand for one causes an increase in
demand for the other.
-?An increase in the price of a complementary good reduces demand for the good in
A wide variety of other factors may affect the demand for particular goods and services:
-?Normal growth of prime groups that consume the good or service will
-?ahanges in preferences and tastes are another important factor.
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ELASTIaITY OF DEMAND
measures the responsiveness of a good¶s sales to changes in its price.
-?ènowledge of a good¶s price elasticity allows firms to predict the impact of price
changes on unit sales.
-?Price elasticity guides the firm¶s profit-maximizing pricing decisions.
The is the ratio of the percentage change in quantity and the
percentage change in the good¶s price, all other factors held constant.
-?EP = % ahange in Q/% ahange in P.
Elasticity is written as:
-?££ or ££.
-?Elasticity depends directly on the derivative of the demand function with respect to P.
-?The equations are referred to as mbecause they link percentage
quantity and price changes mm.
m price elasticity is defined as:
?Q is the average of the two quantities Q = (Q0 + Q1)/2 and P is the average of
the two prices, P = (P0 + P1)/2.
-?The main advantage of the arc elasticity measure is that it treats the prices and
quantities symmetrically (it does not distinguish between the and prices
Elasticity measures the sensitivity of demand with respect to price.
Demand is said to be * if .
-?The percentage change in price is exactly matched by the resulting percentage change
in quantity but in the opposite direction.
Demand is if ".
-?An initial change in price causes a larger percentage change in quantity.
Demand is j if .
-?For any price change, the quantity change is zero and therefore so is the elasticity.
Demand is if #.
-?The firm can sell as much output as it likes at the given price because whether it sells
a large or small output quantity will have no effect on its price.
-?The determines the firm¶s price.
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