ecn 203 chapter 4 - ECN 203 – Chapter 4 Market Demand...

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ECN 203 – Chapter 4 Market Demand This chapter answers the following: Why does demand slope downward? How do buyers respond to price changes? What is an elasticity? Demand elasticities? What are the shift variables of demand? How is overall market demand obtained? Why Does Demand Slope Downward? Consumer maximizes utility where MU 1 /P 1 = MU 2 /P 2 = …… = MU n /P n . If P 1 , then consumer should re-optimize by MU 1 to make the ratio equal across goods again. Given diminishing Marginal Utility, this is done by Q 1 . Price Elasticity of Demand Price Elasticity of Demand ( P ) – measures how quantity demanded (Q D ) of a good responds to a change in its price (P). Elastic -- Q D is more responsive to changes in price (Flatter D). Inelastic -- Q D is less responsive to changes in price (Steeper D). Determinants of Price Elasticity of Demand Elasticity depends on the following: 1. Necessity versus Luxury 2. Number & Quality of Substitutes 3. Market Definition 4. Price Change Relative to Income 5. Time Horizon Price Elasticity of Demand: Textbooks According to NBC’s review of the Bureau of Labor Statistics (BLS), textbook prices have risen over three times the rate of inflation from January 1977 to June 2015, a 1,041 percent increase .” Ben Popken. (2015, August 5). “College Textbook Prices Have Risen 1,041 Percent Since 1977.” Retrieved from
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