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Chapter 2

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Paul Cohen

Chapter 2: Making Smart Choices (The Law of Demand) -All choices are based (consciously or not) on a comparison of expected benefits and costs. (Key #1) -The expected benefit question is “How badly do you want it?” What satisfaction do you expect to get form that choice? -Economists describe all your wants—and how intense each want is—as your preferences. -For the second part of the comparison, the cost question is, “How much are you willing to give up for it?” -What you are willing to give up depends on availability of substitutes and their cost. -What you can “afford” is not just about money, it is also about time. You have limited dollars and limited time. Demand: Consumers willingness and ability to pay for a particular product or service. -You make a smart choice when expected benefits are greater than opportunity costs. But the benefits or satisfaction you expect to get depend on the circumstances. -Example of how marginal benefit is important to making smart choices is best described by using the Diamond water paradox. Quantity Demanded: Amount you actually plan to buy at a given price. -As price rises, the quantity demand decreases. In general, when prices rise, consumers look for substitutes. When something becomes more expensive people economize on its use. Market Demand: The sum of demands of all individuals willing and able to buy a particular product/service. Law of Demand: If the price of a product/Service rises, quantity demanded decreases. (Market for water in Toronto when the city stated charging a pay per use as apposed to a lump some—Water or brooms?) -If the price of a product/service changes, that affects quantity demanded -If anything else changes that effects demand. -In the real world, everything is related to everything else, making it difficult to distinguish an events actual cause from its apparent causes. Scientist use controlled laboratory experiments to keep all interrelated factors unchanged. Economists can’t conduct controlled experiments. Instead, we use distinctions like change in quantity demand versus change in demand to mentally mimic controlled experiments. Five ways to change Demand (#C, PR, PORP, I, EFP) 1. Preferences 2. Prices of related products (Substitutes and complements) 3. Inco
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