chapter 4

chapter 4 - Demand What determines buying plans? -The price...

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Unformatted text preview: Demand What determines buying plans? -The price of the good (a move along the curve) -Main factors bring changes in demand (a shift of the curve) i. The prices of related goods ii. Income iii. Population, (size, ethnicity, or age structure/distribution) iv. Preferences, (attitudes towards goods and services) v. Expected future prices and income The demand of a good is a function of its own price (inverse), income, prices of other goods (Px, Py), and utility. These four items can affect the private demand of individual goods. In addition to these factors, population (sums and structure), income distribution, and expected income can affect the market demand of a good. How income affects demand: Most of the goods and services that we know are known as normal. Inferior goods are generic goods (pharmaceuticals, etc.) because there are better, brand-name items. Public transportation is also an inferior good, because if you are very poor then you can not afford the alternative: a car. Neutral goods have no income effect. Salt or basic spices can be considered neutral goods. Necessary normal goods vs. luxury normal goods Luxury items are things that when your income goes up, not only in absolute terms, you consume more, but the relative share (the weight in the whole basket) goes up. For example: jewelry. If you have $1,000 a month, I consume jewelry of $10. But if I have $2,000 a month, I consume jewelry at $100. Supply What determines selling plans? -The price of the good (a move along the curve) -Main factors bring changes in supply (a shift of the curve) i. Price of productive inputs/factors (energy, work) ii. Technology changes or improvement iii. The number of suppliers iv. Price of related goods produced a. Substitutes in production b. Complements in production v. Exogenous variables (e.g. weather, epidemics, natural disasters) vi. Expected future prices Moving along the curve vs. a shift in the curve (shift in supply) [when looking at how price affects demand, supply being the curve] Horizontal summation: adding up all the quantity demanded in order to find out D, or demand of the entire market This summation gives us demand and supply, which leads us to equilibrium, where quantity and price are equal Demand -> Quantity Demanded -> Quantity Bought Supply -> Quantity Supplied -> Quantity Sold ...
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This note was uploaded on 09/21/2011 for the course ECON 010 taught by Professor Stein during the Fall '07 term at UPenn.

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