MicroWeek1LectureNotes

MicroWeek1LectureNotes - Week 1 Lecture Notes Chapters...

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1 Week 1 Lecture Notes Week 1 Lecture Notes Chapters 6,7,8
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2 Demand Demand Demand • It is a schedule or curve that shows the various amounts of a product that consumers are willing to buy at each of a series of prices over a given time. • Law of Demand states as prices fall, demand rises and as prices rise, demand falls Explanation: • Income effect – lower prices increase purchasing power of a buyer • Substitution effect – at lower prices, buyers have the opportunity to substitute a less expensive product for other products that are relatively more expensive Each product has a demand curve in which explains a lot about the product. Demand curves can be steep or more flat depending how consumers react to changes in their personal income as it relates to purchasing this product. Additionally, the availability of less expensive substitutes and a consumer’s willingness to buy a substitute implies that there may not be any brand loyalty, therefore it is a very elastic product. .
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3 Determinants of Demand Determinants of Demand Determinants of Demand • Buyers tastes or preferences • Number of buyers - more buyers, higher demand • Changes in buyer’s Income • Prices of related or substitute goods - are they more or less expensive • Complementary goods – If tuition prices fall, demand for textbooks would increase • Consumer Expectations – expectations of future prices The determinants of demand explain why may have a high or low demand for different goods. When making choices, subconsciously we incorporate some or all of these considerations in our final decision. The more informed we are about substitutes, or future expectations, the better decision we will make.
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4 Price Elasticity of Demand Price Elasticity of Demand Price Elasticity of Demand • Measures responsiveness to price changes •I f E l a s t i c d em a n d – Large change in quantity purchased for given price change, > 1 f I n e l a s t i c d a n d – Small change in quantity purchased for given price change, < 1 • If Unitary Elastic Demand – Equal change in quantity purchased for given price change, = 1
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5 Price Elasticity of Demand Price Elasticity of Demand Elasticity Formula Price-elasticity coefficient and formula % Change in Quantity Demanded of Product X Ed = --------------------------- % Change in Price of Product X Elastic Demand Ed = .10/.05 = 2 Inelastic Demand Ed= .02/.05 = .4 Unitary Elastic Ed= .05/.05 = 1 If a firm decided to reduce prices by 5% and the corresponding increase in quantity sold was 10%, then you increased total revenue. Despite selling the good for a lower price, revenue was made up by an increase in goods sold by two-fold. Therefore, this is an elastic product. On the flip side, if prices were raised 5% for a good, but the corresponding decrease in sales was only 2%, total revenue was increased and we can say our product is inelastic, characteristic of items that are necessities.
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6 Price Elasticity of Demand Price Elasticity of Demand Elasticity • Why use percentages?
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MicroWeek1LectureNotes - Week 1 Lecture Notes Chapters...

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