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101-10_07 - Econ 101 Lecture 10 Substitution is the most...

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Econ 101 Lecture 10 Substitution is the most important reason for the law of demand. When the price of something rises, we turn to substitutes. When the price of energy rises, people: •form carpools •take fewer trips •buy 4-cylinder cars •take public transportation •move closer to work •turn down their thermostats •install insulation & storm windows •install solar heaters •buy more efficient appliances Example 10.1. Who is more likely to buy the more efficient model of window air conditioner, the person who wants a machine for the house she lives in all summer, or the person who wants a machine for the cottage she visits on summer weekends? More efficient air conditioners cost more: More sophisticated design More costly components The more efficient machine is more likely to justify its higher price the more one uses it. So the person who plans to use the machine all summer is more likely to buy the more efficient machine. Example 10.2. Why do the Japanese live in smaller houses than Americans? Cultural differences? Yes, but why these cultural differences? The differences are a simple consequence of the law of demand. Market price of all land in Japan (about the area of California) exceeds the market price of all land in North and South America and Western Europe combined. Rational Japanese consumers respond by buying smaller houses. Example 10.3. In the U.S., gravel for road building is made by enormous machines that crush boulders into smaller stones. In Nepal, gravel is made by workers who hammer rocks into smaller stones. Why this difference?
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