Chapter 3 notes - Chapter 3 Where Prices Come From The...

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Chapter 3 Where Prices Come From: The Interaction of Demand and Supply The Demand Side of the Market The main price of a consumer’s decision is the price of the product. The Demand of an Individual Buyer Quantity Demanded : the amount of a good or service that a consumer is willing and able to purchase at a given price. Demand Schedules and Demand Curves Demand Schedule : a table showing the relationship between the price of a product and the quantity of the product demanded. Demand Curve : a curve that shows the relationship between the price of a product and the quantity of the product demanded. The demand curve slopes downward because the consumer will buy more of one product as the price falls. o Buyers demand a larger quantity of a product as the price falls because the product becomes cheaper relative to other products and because they can afford to buy more at a lower price. Individual Demand and Market Demand Market Demand : the demand by all the consumers of a given good or service. The market demand curve tells us how many units of the product consumers in this market would be willing to buy at each price during a certain period of time. The market demand curve is downward sloping: as the price of the product falls, the quantity of printers demanded increases. The inverse relationship between the price of a product and the quantity of the product demanded is known as the law of demand . o Law of Demand : 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? SUBSTITUTION EFFECT Substitution Effect : the 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. o This leads consumers to buy more of a good when its price falls. Income Effect : the change in the quantity demanded of a good that results from the effect of a change in the good’s price on consumer purchasing power. o Purchasing power refers to the quantity of goods that can be bought with a fixed amount of income. o When the price a good falls, the increased purchasing power of consumers’ incomes will usually lead them to purchase a large quantity of the good. Holding Everything Else Constant: The Ceteris Paribus Condition Ceteris Paribus : (“all else equal”) the requirement that when analyzing the relationship between two variables—such as price and quantity demanded—other variables must be held constant.
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A shift in the demand curve is an increase or decrease in demand.
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