Chapter 5 Market Demand

Chapter 5 Market Demand - Part II Chapter 5 Market Demand...

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Part II Chapter 5 Market Demand News Reporter on CNN, June, 2009 : “. . . sales of houses in Southern California made a comeback showing last month showing a resurgence of demand” Guest Commentator 1 : “Actually, this is just mopping up a glut of surplus housing. There is no sign that consumers are really coming back to the market. Rents are so low, its making them hesitate. Guest commentator 2: “ On the contrary, price settling and the new tax credit is reviving the market - - at least for now. We’ll just see if the sparks catch and prices hold.” Reporter: “Here’s hoping . . .” Aside from the fact that their language is more appropriate to a bad sitcom than news programming, they are trying to analyze what is happening to demand in the housing market – whether and why it is changing – based on a few pieces of information and a knowledge of what factors affect demand. In this chapter, we will spell out these factors and learn to use the economic model of demand. Demand is a description of the buyers’ willingness to make purchases in a market. As we saw in the chapter on consumer choice, each consumer will decide how much of a particular good to buy based on their income, the price of the good, the prices of other goods and the benefit they will get from each unit of the good that they buy. The Price Mechanism and Demand The most important factor determining demand and the factor that connects Demand and Supply is price. This is because it is the factor that signals to producers how much the consumer wants the good, serves as an incentive for producers to produce more or less of it and as an incentive for consumers to buy more or less of it, and thus works to clear the market and bring it in to equilibrium. So, while there are several factors that determine demand, economists have created a simple model that only shows the effect of changes in price on the quantity that consumers would buy, if no other factors changed. For example, consider the demand for milk. Suppose that currently the price of orange juice is $2 per bottle. Now, if consumers’ incomes and the prices of all other goods and consumer benefits all remained the same, what would the effect be of a increase in the price of orange juice? This we can figure out from the consumer equilibrium principle. If the price of orange juice increases, the marginal benefits per dollar for all consumers will decrease. They will adjust by shifting their purchases, buying less orange juice and more of other goods. Law of Demand This ‘inverse’ relationship (meaning that as one increases the other decreases) between price and the quantity that is demanded is called the Law of Demand . All else equal,
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the higher the price, the lower the quantity demanded. This is a relationship that is very consistent in economics. Some students think that they have found an exception for goods that are very expensive,
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This note was uploaded on 07/17/2011 for the course ECON 102 taught by Professor Jarv during the Summer '09 term at Rio Hondo College.

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Chapter 5 Market Demand - Part II Chapter 5 Market Demand...

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