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Chapter_3_Notes

# Chapter_3_Notes - Chapter 3 Notes Chapter 3 Where Prices...

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Chapter 3 Notes Chapter 3 Where Prices Come From: The Interaction of Demand and Supply This chapter reinforces the concepts of simple supply (S) and demand (D). These were covered in Micro (Econ 2000) but since the ideas of supply and demand will be used at times throughout the course, it is good to review the workings of a simple S and D model. The Demand Side of the Market In a simple S and D model, consumers are the ones who determine the demand for a good. When discussing demand we are considering what a consumer is both willing and able to buy not what they want to buy (unlimited wants and scarce resources). Demand Schedule – a table showing the relationship between the price of a product and the quantity of the product demanded - Quantity demanded (Q d ) is the amount of a good or service that consumer is willing and able to purchase at a given price Demand Curve – a curve that shows the relationship between the price of a product and the quantity of the product demanded (assume a straight line for convenience) 1

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Chapter 3 Notes Assume this is a market demand curve. A market demand curve is the demand by all consumers of a given good or service. Law of Demand – Everything else held constant, when the price of a product falls, the quantity demanded of the product will increase, and when the price of a product rises, the quantity demanded of the product will decrease - This explains the inverse relationship between price and quantity demanded P↑ Q d ↓ or P↓ Q d The idea that consumers demand more goods at lower prices and fewer goods at higher prices, everything else held constant, is relatively intuitive. But economics needs more than that to explain a law this important. There are two effects at work when the price of a good changes. 1. Substitution effect – refers to the change in the quantity demanded of a good that results from a change in price - that makes other goods more or less expensive relative to other substitutes Price of coke increases → quantity will do down because people will substitute other drinks for coke aka substitute away from it 2.
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Chapter_3_Notes - Chapter 3 Notes Chapter 3 Where Prices...

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