Chapter_3_Notes.docx

Chapter_3_Notes.docx - Chapter 3 Notes: Where Prices Come...

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Chapter 3 Notes: Where Prices Come From: The Interaction of Demand and Supply. Shifts in Demand Quantity Demanded -- The amount of a good or service that a consumer is willing and able to purchase at a given price. The Law of Demand -- The inverse, or negative, relationship between the price of the product demanded and the quantity of the product demanded. o Holding everything else constant (Ceteris Paribus), as Price increases Quantity Demanded decreases, and vice versa. Demand Curve — Graphical representation of the relationship between price and quantity demanded. Why Does the Law of Demand Hold? Substitution Effect —The change in price makes the good more or less expensive relative to other goods that are substitutes. o A change in relative price. o If the price of Coke rises relative to Pepsi => The relative price of Pepsi has fallen => This will cause an increase in the quantity demanded for Pepsi. Income Effect --The change in the quantity demanded of a good that results from the effect of a change in the good’s price on consumer purchasing power. o Purchasing Power —The amount of goods a consumer is able to purchase based upon his/her income. o An increase in the price of Coke reduces a consumer’s purchasing power. Holding constant the number of other goods consumed (purchased), the consumer can no longer afford the same quantity of Coke. Shifts in Demand Holding Price constant, actions that cause the quantity demanded to increase or decrease.
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Income Normal Good —A good for which the demand increases as income rises and decreases as income falls. o Football Tickets Inferior Good — A good for which the demand increases as income falls, and decreases as income rises. o
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This note was uploaded on 02/25/2010 for the course ECON 2010 taught by Professor Roussel during the Spring '08 term at LSU.

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Chapter_3_Notes.docx - Chapter 3 Notes: Where Prices Come...

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