ch3 - NCSU EC-202 PRINCIPLES OF MACROECONOMICS Department...

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NCSU EC-202 PRINCIPLES OF MACROECONOMICS Department of Economics Summer II 2008 CHAPTER 3 Where Prices Come From: The Interaction of Demand and Supply. The model of supply and demand explains how prices are determined in a market system. 1. The Demand Side of the Market 1.1 Many factors influence the willingness and ability of consumers to buy a particular product. The main influence on consumer decisions will be the price of the product. Quantity demanded is the amount of a good or service that a consumer is willing and able to purchase at a given price. ● A demand schedule is a table showing the relationship between the price of a product and the quantity of the product demanded. ● A demand curve shows the relationship between the price of a product and the quantity of the product demanded. ○ A demand curve may be constructed for each individual consumer in a market. ○ A market demand curve shows the total demand of all consumers in a market. The law of demand states that 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. The law of demand is explained by the substitution and income effects. ● The substitution effect is the change in 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. ● The income effect is 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.
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1.2 Ceteris paribus (“all else equal”) is the requirement that when analyzing the relationship between two variables – such as the price and quantity demanded – other variables must be held constant. Factors other than price influence demand. When one of the non-price factors that influence demand changes, a shift in demand – an increase or decrease in demand – results. The following are the most important non-price influences on demand.
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This note was uploaded on 04/21/2009 for the course EC 202 taught by Professor Sturgill during the Spring '07 term at N.C. State.

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ch3 - NCSU EC-202 PRINCIPLES OF MACROECONOMICS Department...

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