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Unformatted text preview: Economics 2003-04: Microeconomics Page 1 SECTION 2: MICROECONOMICS 2.1 MARKETS The Demand Curve The demand curve shows the quantity of a good that consumers want at each price, assuming they have the effective purchasing power (income) to pay. The law of demand states that a higher quantity will be demanded at a lower price assuming other factors such as the price of substitutes are unchanged. Quantity demanded refers to a continuous flow of purchases per period of time. A single point on the demand curve reflects the quantity demanded at that price. Movements Along the Demand Curve (Own Price Effect) Movements along the demand curve lead to changes in quantity demanded. Price and quantity demanded are negatively related: Demand is downward sloping: each increment in consumption leads to less and less satisfaction, and the consumer will buy more only for a lower price. As price rises, the quantity demanded of the good or service tends to fall It becomes an increasingly expensive way to satisfy the need or want associated with the good or service. People switch in part to some other goods or services to satisfy the same need, and less will be purchased of the good that has gone up in price. As the price of the good falls, it becomes relatively cheaper and more of it will be purchased and less of substitute goods. Shifts in the Demand Curve (Income, Taste, Price of other goods, Advertising) The demand curve will shift out if more is demanded at each price and is caused by changes in factors other than the price of the good itself: Substitutes: if the price of coffee falls, many people will shift from drinking tea to drinking coffee and the demand curve for tea shifts in to the left. Complements: these are goods which tend to be used jointly. If the price of gasoline rises people are motivated to use their car less, and the demand for cars shifts to the left. Real income: when income rises, more people can afford to buy cars and the demand curve for cars shifts to the right for normal goods. Population: if the population grows there are more consumers and demand will shift out to the right. Tastes: more people may want the product or service and demand shifts out. Advertising: the more effective the advertising the greater the demand, unless the government uses negative advertising for things such as the dangers to health from cigarette smoking. Page 2 Economics 2003-04: Microeconomics Credit: more credit means it is easier to borrow for durable goods like cars and...
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This note was uploaded on 04/23/2011 for the course ECON 100 taught by Professor Mr.smith during the Spring '11 term at DeVry Sandy.
- Spring '11