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Econ Chapter 4 - Econ Chapter 4 8:57:00 PM Invisible Hand A...

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Econ Chapter 4 24/02/2008 21:57:00 Invisible Hand A phrase used by Adam Smith to describe how, by pursuing their own self- interests people in a market system are “led by an invisible hand” to promote the well  being of the community Demand and Quantity Demanded The quantity demanded of any product normally depends on its price. Quantity  demanded also depends on a number of other determinants, including population size,  consumer income, tastes and the prices of other products. There is no one-demand figure for milk, or for computers, or for engineers.  Rather there is a different quantity demanded at each possible price, all other influences  being held. Constant. The Demand Schedule A table showing how the quantity demanded of some product during a specified  period of time changes as the price of that product changes, holding all other  determinants of quantity demanded constant. It indicates how much [milk] consumers in a particular area are willing and able to  buy at different possible prices during a specified period of time, other things being held  equal. As price rises, some customers will reduce the quantity of [milk] they consumer.  Higher prices will induce some customers to drop out of the market entirely – switching  to [juice or soda].  Quantity demanded will decline as the price rises. The Demand Curve Shows the relationship between price and quantity demanded.
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Shifts of the Demand Curve A change in the price of a good produces a movement along a fixed demand  curve. By contrast, a change in any other variable that influences quantity demanded  produces a shift of the entire demand curve to the right (increase) or the left (decrease). Examples of Outside Variables… Consumer Incomes     : If average incomes rise, consumers will purchase more  of most goods, including milk, even if the prices of those goods remain the  same. Shift to the right. Population:      Affects quantity demanded in more or less the same way as  increases in average income, larger population will presumably want to  consumer more milk, even if the price of milk and average income do not  change. Shift to the right. Consumer Preferences     : If dairy industry mounts a successful advertising  campaign extolling the benefits of drinking milk, families may decide to buy  more at any given price. If consumer preferences shift in favor of a particular  item, its demand curve will shift outward to the right.
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