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Unformatted text preview: C H A P T E R 9 Demand for Goods and Supply of Labor and Capital Now we have finally arrived at the point where we talk about demand curves. These summarize the relationship between some aspect of the consumer’s economic cir- cumstances and the quantity she demands of a particular good. Although we typ- ically think of demand curves as illustrating the relationship between quantity of x demanded and the price of x , demand curves can also illustrate the relationship between quantity and income or between quantity and the price of some other good. Each of these demand curves is just a “slice” of a more complicated demand relationship (that we call a demand function in part B) — with that slice holding all but one of the economic variables that define a consumer’s economic circum- stances fixed. And, just as demand curves emerge from the consumer’s diagram, supply curves for labor and capital emerge from the worker’s and saver’s diagrams (and demand curves for capital emerge from the borrower’s diagram.) Chapter Highlights The main points of the chapter are: 1. Demandandsupply relationshipsillustrate how choicesdependon aspects of the economic environment — where the economic environment poten- tially includes income and prices for different types of goods. 2. When we isolate the impact of one particular aspect of that economic en- vironment, we are implicitly holding all other aspects of that environment fixed — i.e. we are graphing a “slice” of a more complicated function that tells us how behavior changes as all these aspects of our economic environ- ment change. 3. While we can illustrate these relationships as demand and supply curves, they ultimately emerge from the underlying choice model we have devel- oped and can be understood only with that framework in mind. Demand for Goods and Supply of Labor and Capital 144 4. Income-demand relationships depend only on income effects — and thus the relationship of indifference curves to one another. Price-demand rela- tionships depend on both income and substitution effects and thus also depend on the degree of substitutability between different goods. 5. Labor and capital supply relationship often involve wealth and substitution effects that point in opposite direction. This implies that, despite all goods (typically) being normal goods, the labor and capital supply curves can slope up or down depending on which effect dominates . Using the LiveGraphs For an overview of what is contained on the LiveGraphs site for each of the chapters (from Chapter 2 through 29) and how you might utilize this resource, see pages 2-3 of Chapter 1 of this Study Guide . To access the LiveGraphs for Chapter 9, click the Chapter 9 tab on the left side of the LiveGraphs web site....
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This note was uploaded on 11/17/2010 for the course ECON 100A taught by Professor Woroch during the Fall '08 term at University of California, Berkeley.
- Fall '08