lect01Supply_and_Demand

# lect01Supply_and_Demand - Review of Supply and Demand A...

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Unformatted text preview: Review of Supply and Demand A consumer’s demand for a good is the amount of the good that they she is willing and able to buy. Let X 1 d equal the number of units of good 1 demanded by the consumer X 1 d depends on a number of factors: The price of good 1, P 1 The amount of income the consumer has, I The prices of other goods, P 2 The consumer’s preferences or tastes, u We can think of the relationship between X 1 d and these factors as being the demand function for the consumer: X 1 d = X 1 (P 1 ,P 2 ,I,u) The typical demand curve picture traces out the relationship between X 1 d and P 1 . In other words, holding everything else constant, how does a change in P 1 affect X 1 d ? X 1 P 1 X 1 d A change in P 1 means that we move along this demand curve (a change in quantity demanded). A change in any other of the factors that influences the demand for good 1 means that we shift the demand curve For example: An increase in I cause the demand curve of X 1 to shift out (if X 1 is a normal good) Change in I causes a shift in the Demand Curve for X 1 (Change in Demand) a.) Normal: as I increases, the Demand for Q 1 shifts out b.) Inferior: as I increases, the Demand for Q 1 shifts in Change in P 2 causes a shift in the Demand Curve for X 1 (change in demand) a.) Substitutes: as P 2 increases, the demand for X 1 shifts out b.) Complements: as P 2 increases, the demand for X 1 shifts in X 1 P 1 Change in tastes or any other factor that influences the demand for good 1 causes a shift in the Demand Curve for X 1 We typically measure the responsiveness of demand relationships in terms of elasticities of demand. The price elasticity of demand is the ratio of the % change in X 1 to the % change in P 1 The cross price elasticity of demand is the ratio of the % change in X 1 to the % change in P 2 The income elasticity of demand is the ratio of the % change in X 1 to the % change in I Percentage changes can be viewed as partial derivatives for small...
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lect01Supply_and_Demand - Review of Supply and Demand A...

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