ECON_2306 => Lecture 3 Slides

E the second big mac yields less extra satisfaction

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Unformatted text preview: t results as one consumes additional units of a good or service, i.e., the second “Big Mac” yields less extra satisfaction (or utility) than the first. Income effect: A lower price increases the purchasing power of money income, enabling the consumer to buy more at a lower price (or less at a higher price). Substitution effect: A lower price gives an incentive to substitute the lower-priced good for now relatively higher-priced goods. 21 Principles of Microeconomics Which Which of the following establishes the inverse relationship between the price of a product and the the quantity of the product demanded? a. The substitution effect. b. The income effect. c. The law of demand. d. The price effect. 22 Principles of Microeconomics Which Which of the following establishes the inverse relationship between the price of a product and the the quantity of the product demanded? a. The substitution effect. b. The income effect. c. The law of demand. d. The price effect. Demand F. There are several determinants of demand or the “other things,” besides price, which affect demand. Changes in determinants cause changes in demand. Tastes—-favorable change leads to an increase in demand; unfavorable change to a decrease. Number of buyers—more buyers lead to an increase in demand; fewer buyers lead to a decrease. Income—more leads to an increase in demand; less leads to a decrease in demand for normal goods. (The rare case of goods whose demand varies inversely with income is called inferior goods) varies inversely with income is called inferior goods). Prices of related goods also affect demand. Substitute goods (those that can be used in place of each other): The price of the substitute good and demand for the other good are directly related. If the price of Coke rises (because of a supply decrease), demand for Pepsi should increase. Complementary goods (those that are used together like tennis balls and rackets): When goods are complements, there is an inverse relationship between the price of one and the demand for the other. Expectations—consumer views about future prices, product 24 availability, and income can shift demand. Principles of Microeconomics 23 Principles of Microeconomics 6 Demand 2. A summary of what can cause an increase in demand. Favorable change in consumer tastes. Increase in the number of buyers. Rising income if product is a normal good. Falling incomes if product is an inferior good. Increase in the price of a substitute good. Decrease in the price of a complementary good. Consumer expectation of higher prices or incomes in the future. Demand 3. A summary of what can cause a decrease in demand. Unfavorable change in consumer tastes. Decrease in number of buyers. Falling income if product is a normal good. Rising income if product is an inferior good. Decrease in price of a substitute good. Increase in price of a complementary good. Consumers expectation of lower prices or incomes in the future. 25 Principles of Microeconomics Principles of Microeconomics 26 BD = Budget Deficit T = Taxes G = Gov't Spending BD (T - G) TD EXP - IMP TD = Trade Deficit EXP = Exports IMP = Imports Ricardian T-G GR...
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