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Aggregate Demand and Horizontal Addition

Aggregate Demand and Horizontal Addition - doesn't lose his...

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Aggregate Demand and Horizontal Addition We have been looking at how changes in price can affect buyers' decisions: when price increases, demand decreases, and vice versa. However we have been assuming that when the price changes, all else is staying the same; this restriction allows us to use the same demand curve, with changes in demand being represented by movements up and down the same curve. This model of a buyer moving up and down one demand curve is correct if the only thing that is changing is the price of the good. If preferences or income change, however, the demand curve can actually shift. For example, let's say that Conan's initial demand curve for concert tickets looks like curve 1. If Conan gets a new job, with a permanently higher income, however, his demand curve will shift outwards, to curve 2. Why is this? Conan realizes that he has more money, and that, as long as he
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Unformatted text preview: doesn't lose his new job, he will always have more money. That means that he can buy more of what he likes, and he will have a higher demand curve for all normal goods. Shifts in Demand Note that for any price level, Conan's demand is now higher than it was before the demand shift. This can also occur with a change in buyer preferences. If Conan suddenly decides that he wants to collect jazz CDs, and he now likes jazz CDs much more than he did before, his demand curve will shift outwards, reflecting his new appreciation of jazz, and his willingness to pay more for the same CDs, since they have become more valuable in his eyes. Shifts in demand curves are caused by changes in income (which make the goods seem more or less expensive) or changes in preferences (which make the goods seem more or less valuable)....
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