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Gecon W2 - week Two Introduction to Economic Reasoning Part...

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week Two- Introduction to Economic Reasoning, Part 2 Law of demand Some Assumptions 1. Each person desires many goods and services. 2. For each person, some goods are scarce. 3. Each person is willing to forsake some of a good to obtain another. 4. The more of a good one has, the larger the total personal use value, but the lower the marginal personal value (diminishing returns). 5. People do not have identical preferences. 6. People are innovative but consistent. ( rationality assumption) 7. People have budget constraints. First Law of Demand- The lower the price at which one can buy a good, ceteris paribus, the more will on purchase the good. (or if price increases, the less will be purchased) What factors shift the demand curve? 1. Income , number of consumers, preferences, access to credit, demographics, expectations, price of a related good (either compliments or substitutes). Consumer surplus- Excess of personal value over the market price New concept- price elasticity of demand o Inelastic: price goes up by 10% demand goes down by less than 10% (drugs, addictive goods) not many substitutes. o Elastic: demand goes down faster than price goes up. (lots of substitutes) Income elasticity of demand- how sensitive is demand to a change in income Second Law of Demand- The longer the amount of time allowed to adjust to a price change, the greater is the change in demand. That is, the greater the elasticity.
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