lect01Supply_and_Demand

lect01Supply_and_Demand - Review of Supply and Demand A...

Info iconThis preview shows pages 1–4. Sign up to view the full content.

View Full Document Right Arrow Icon

Info iconThis preview has intentionally blurred sections. Sign up to view the full version.

View Full Document Right Arrow Icon

Info iconThis preview has intentionally blurred sections. Sign up to view the full version.

View Full Document Right Arrow Icon
This is the end of the preview. Sign up to access the rest of the document.

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...
View Full Document

{[ snackBarMessage ]}

Page1 / 16

lect01Supply_and_Demand - Review of Supply and Demand A...

This preview shows document pages 1 - 4. Sign up to view the full document.

View Full Document Right Arrow Icon
Ask a homework question - tutors are online