Chapter 3--Supply and Demand...Theory

# Chapter 3--Supply and Demand...Theory - Chapter 3-Supply...

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Chapter 3—Supply and Demand: Theory I. Demand A. The law of demand states that as the price of a good rises, the quantity demanded of the good falls, and as the price of a good falls, and as the price of a good falls, the quantity demanded of the good rises, ceteris paribus . The law of demand holds that price and quantity are inversely related. B. Quantity demanded is the total number of units of a good that buyers are willing and able to buy at a particular price. C. A (downward-sloping) demand curve is the graphical representation of the law of demand. D. Factors that can change demand and cause the demand curve to shift include income, preferences, prices of related goods (substitutes and complements), number of buyers, and expectations of future price. 1. Income: As a person’s income changes (increases or decreases), his or her demand for a particular good may rise, fall, or remain constant. a. For a normal good, as income rises, demand for the good rises, and as income falls, demand for the good falls. b. For an inferior good, as income rises, demand for the good falls, and as income falls, demand for the good rises. c. For a neutral good, as income rises or falls, the demand for the good does not change. 2. Preferences: People’s preferences affect the amount of a good they are willing to buy at a particular price. A change in preferences in favor of a good shifts the demand curve rightward. A change in preferences away from the good shifts the demand curve left. 3. Price of Related Goods a. Two goods are substitutes if they satisfy similar needs or desires. Suppose products X and Y are substitutes. If the price of product X increases, then the demand for product Y increases, and if the price of product X decreases, then the demand for product Y decreases. b. Two goods are complements if they are consumed jointly. Suppose products A and B are complements. If the price of product A increases, then the demand for product B decreases, and if the price of product A decreases, then the demand for product B increases.

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Chapter 3--Supply and Demand...Theory - Chapter 3-Supply...

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