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Chapter 3

ECON 1116 Chapter 3: Chapter 3- ECON

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Department
Economics
Course
ECON 1116
Professor
Michael P.Stone
Semester
Spring

Description
Chapter 3 Where Prices Come From: The Interaction of Supply & Demand Perfectly competitive market: market that meets the conditions of having many buyers and sellers, all firms selling identical products and no barriers to new firms entering the market I. The Demand Side of the Market Demand Schedules and Demand Curves Demand schedule: a table that shows the relationship between the price of a product and the quantity of the product demanded Quantity demanded: amount of a good or service that consumer is willing and able to purchase at a given price Demand curve: curve that shows the relationship between the price of a product and the quantity of the product demanded Market demand: The demand by all the consumers of a given good or service The law of demand Rule that states that holding everything else constant when the price of a product falls, the quantity demanded of the product will increase and when the price of a product rises, the quantity demanded of the product will decrease. What explains the Law of Demand? When the price of a product falls, consumers buy a larger quantity because of two effects: the substitution effect and the income effect 1. Substitution effect: change in the quantity demanded of a good that results from a change in price, making the good more or less expensive relative to other goods that are substitutes 2. Income effect: change in the quantity demanded of a good that results from the effect of a change in the good’s price on consumers purchasing power Purchasing power: quantity of goods a consumer can buy with a fixed amount of income. Holding everything else constant: the ceteris paribus condition Ceteris Paribus “all else equal” condition: The requirement that when analyzing the relationship between two variables such as price and quantity demanded other variables must be held constant. Variables that shift market demand Many variables can influence market demand: - Income - Prices related goods - Tastes - Population and demographics - Expected future prices 1. Income - income that consumers have available to spend affects their willingness and ability to buy a good - Normal good: a good for which the demand increases an income rises and decreases as income falls - Inferior good: good for which the demand increases as income falls and decreases as income rises 2. Prices of related Goods - The prices of other goods can also affect consumers’ demand for a product. - Goods and services that can be used for the same purpose are called substitutes: the more you buy one the less you will buy another - Goods and services that are used together are called complements: the more consumers buy one the more they will buy of the other. 3. Tastes - An advertising campaign for a product can influence consumer demand affects consumer’s tastes for a product - Tastes can change: when it increases demand curve shifts to the right When it decreases  demand curve shifts to the left 4. Population and demographics - Demographics: characteristics of a population with respect to age race and gender - Demographics change so the demand for goods will increase or decrease 5. Expected Future Prices - Consumers choose products to buy and when to buy them - If they are convinced that houses will be selling for lower prices in three months, the D for houses will decrease postpone their purchase to wait for the expected price decrease. Change in demand versus change in quantity demanded Change in demand: shift of the demand curve because of a change in one of the variables other than the price of the product that affects the willingness of suppliers to buy the product. Change in quantity demanded: movement along the demand curve as a result of a change in the product’s price II. The Supply Side of the Market Supply Schedules and Supply Curves Supply schedule: table that shows the relationship between the price of a product and the quantity of the product supplied Supply curve: curve that shows the relationship between the price of a product and the quantity of the product supplied The law of supply Rule that states that holdi
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