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Chapter 5

Chapter 5 Full Notes

6 Pages
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Department
Economics
Course Code
ECON 1131
Professor
All

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Chapter 5: Demand and Elasticity  Demand: the amount of product that individuals are willing and able to buy over a certain period of time o The amount consumers demand is not always equal to the amount they actually buy Individual Demand and the Consumer’s Economic Problem  Objective: achieve the greatest possible utility, or satisfaction, from consuming goods and services  Alternatives: the various goods and services that provide utility  Constraints: limited income, price of the g/s (and price of substitute g/s)  Tastes or preferences determine how much satisfaction is achieved from consuming different amounts of each product  Income is the scarce resource in this problem The Individual Demand Curve  Economists are interested in the effect of the price of a product on its quantity demanded  If we want to isolate the influence of price on quantity demanded, we must assume that all the factors influencing quantity demanded except price are held constant (OTE)  The higher the price of a product, the smaller the quantity demanded; the lower the price of a product, the larger the quantity demanded o The inverse relationship between price and quantity demanded is indicated by the demand schedule  Individual demand schedule: the quantity of a good that an individual is willing and able to buy at each price, OTE  Individual demand curve: a graphical representation of the individual demand schedule, showing the quantity of a good that an individual is willing and able to buy at each price; OTE The Law of Demand  The inverse relationship between price and quantity demanded holds with such regularity that is it elevated to the status of a law of human behavior  Law of demand: OTE, the lower the price of a product, the larger the quantity demanded; the higher the price of a product, the smaller the quantity demanded  Situations where the law is violated are extremely rare; we always expect price and quantity demanded to be inversely related The Substitution and Income Effects  Why are individual demand curves for most products downward sloping? o Substitution effect and income effect  Substitution effect (of a price change): the tendency to purchase more of those products that have become relatively cheaper and fewer of those products that have become relatively more expensive when relative prices change o Based on the idea that consumers compare all products when deciding how much of each product they want to buy  Purchasing power: the amount of goods and services that consumers are able to buy with their limited incomes, given prices, aka real income o Purchasing power increases when the price of any product decreases  Income effect (of a price change): the change in the quantity demanded of a good due to the effect that the change in its price has on an individual’s purchasing power or real income  When the price of a product decreases, OTE, both in the substitution and income effects lead to an increase in quantity demanded The Market Demand Curve  The market demand curve for a product registers the total quantity demanded at each price by all consumers, OTE  Individual demand schedules are likely to differ because people have different tastes and different incomes  Market demand schedule: the total amount demanded of a good by all consumers at each price, ote; the summation of the individual demand schedules  The market demand curve is derived by adding the individual demand curves horizontally at each price Change in Quantity Demanded versus Change in Demand  Subtle distinction in terminology  Change in quantity demanded: a movement along the demand curve as price changes, ote  Change in demand: a shift in the entire demand curve. Occurs when one of the “other things” influencing demand (income, tastes, price of a related product) changes o These factors are not shown on the axes and they determine the position and slope of the curve Income  More income= more ability to purchase goods and services  Increase in income increase in demand--- demand curves shift up and to the right  Decrease in incomedecrease in demand--- demand curves shift down and to the left  Normal good: a good whose consumption rises as income rises, ote  For some products, changes in income shift the demand curve in the opposite direction (ex: less tender cuts of beef like chuck)- these goods are called inferior goods Tastes or Preferences  Changes in consumers’tastes shift demand curves Population  Increasing population tends to increase demand for all products simply b/c more and more individual demand curves are being added to the market demand curve demand curve shifts to the right  Decreasing population demand curve shifts to left Prices of Related Products: Substitutes and Complements  Related products can be either substitutes or complements  Substitutes: products that provide the same general kinds of services; specifically, two goods whose relationship is such that a decrease in the price of one good decreases the demand for the other good, and vice versa  Complements: products that are used together to provide a service; specifically, two goods whose relationship is such that a decrease in the price of one good increases the demand for the other good o Ex price of DVD’s and DVD players- if price of DVD’s goes down, the demand for DVD players will go up Graphing Other Demand Relationships  Any one of the separate effects on quantity demanded can be selected and placed on the graph Income and Quantity Demanded  Engel curve: a graphical representation of the relationship between income and quantity demanded, OTE  Amarket Engel curve shows the other things equal relationship between total income available to consumers and the total quantity demanded for all consumers
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