201-lecture-03-demand-Final 1

201-lecture-03-demand-Final 1 - More on Consumer Theory Our...

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- Principles of Microeconomics 1 More on Consumer Theory More on Consumer Theory Our discussion: Our discussion: 1. Rising prices 2. Individual responsiveness 3. Demand determinants 4. Shipping the good apples out 1. 1. Rising Prices Rising Prices ± Q: Why do we see inflation? “Big business” milks helpless consumers for all they can? Unions force companies to raise wages… companies have to raise prices to survive? ± Why do these explanations fail? They are based on ad hoc changes in tastes. ± The law of demand says that the marginal value of any good falls as its quantity increases relative to other goods. This law also applies to money/currency. The price of one US dollar is measured by the amount of other goods one would be willing to give up in order to hold the dollar. If one unit of some good, x , has a price of US$5, then the price of US$5 is one unit of x , or the price of US$1 is 1/5 th of a unit of x . ± What if the supply of this good increased and the dollar-price fell to $4. The price of a dollar, in terms of this particular good, increases to 1/4 th of a unit. ± What if the quantity of money increases relative to the amount of goods available? The price of money will fall in terms of x . The price of x will rise in terms of money. ± When the government prints money in much greater amounts than the amounts of other goods available increase, the inevitable consequence is a decrease in the marginal value of money, or, equivalently, an increase in the price of goods in terms of money. This is the fundamental reason for
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This note was uploaded on 05/11/2008 for the course EC 201 taught by Professor Online during the Spring '07 term at University of Oregon.

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201-lecture-03-demand-Final 1 - More on Consumer Theory Our...

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