Notes 02

Notes 02 - Notes 02 Introductory Microeconomics ECON 1110 I...

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Notes 02 - Introductory Microeconomics ECON 1110 I. A BRIEF REVIEW OF DEMAND Demand , or the Demand Curve, maps out the quantity of a good that will be willingly purchased (the quantity demanded ) at each price, while holding fixed the other factors that influence the location of the demand curve. Specifically, these other factors are: 1. Income (I) 2. The price of related goods (P x ) 3. Tastes, or anything else that can affect the location of the demand curve (X) 1 st Law of Demand : As price increases the quantity demanded decreases, ceteris paribus. ( Ceteris paribus is Latin for “all else constant,” and indicates that first law of demand applies as long as the three factors listed above are held constant.) Changes in income, the price of other goods, or tastes shift the demand curve. That is, when tastes, income or the price of other goods change, the amount of the good that a consumer is willing to buy at any price changes. Examples: The price of coffee beans increased so much due to bad weather in Brazil that worldwide coffee bean consumption is down 10% this year. (Describes changes in the quantity demanded of coffee beans, or a movement along the demand curve for coffee beans.) The price of coffee beans increased so much due to bad weather in Brazil that consumption of tea is up 5% this year. (Describes a shift in the demand for tea.) Mean income in northern Chicago has risen 10% relative to the U.S. in the last 5 years. Because of this, coffee consumption has increased 20%. (Describes a shift in the demand for prepared coffee.) The change in the price of related goods can shift the demand curve either in or out: Two goods are substitutes if, when the price of good X rises, demand for good Y rises . Two goods are compliments if, when the price of good X rises, demand for good Y falls . A change in income can also shift the demand curve either in or out: A good is normal if, when income rises, the demand for this good rises . A good is inferior if, when income rises, the demand for this good falls . An INDIVIDUAL DEMAND FUNCTION maps out the quantity of a good that an individual will buy at each price. A MARKET DEMAND FUNCTION maps out the total quantity of a good that will be bought in a market at each price. It is the horizontal sum of the individual demand functions. MARGINAL VALUE: Another way of thinking about demand curves is that they trace out the marginal value to consumers of each unit of a good. Marginal value indicates how much additional value a consumer would obtain from consuming one additional unit of a good. A synonym for marginal value is willingness-to-pay - the marginal value indicates the maximum amount that a consumer would be willing to pay to obtain one additional unit of a good. The first law of demand indicates that as additional units of a good are purchased and consumed, the marginal value declines.

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