Ch 3 Demand and Supply

Ch 3 Demand and Supply - Demand and Supply Chapter 3 Demand...

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Unformatted text preview: Demand and Supply Chapter 3 Demand • Demand : maximum quantity a consumer is willing and able to purchase at various prices • Law of demand : Inverse relationship between price and quantity demanded; i.e. higher price, less demanded • Generally we assume a linear relationship between price (P) and quantity demanded (Q d ) 2 Example: Demand for Snickers 3 • Q d = -1/2 P + 6 or • P = -2 Q d + 12 Slope y-intercept Qd P 12 6 (0,12) (6,0) Demand Demand as Marginal Benefit • The demand gives us the marginal benefit of the last good purchased. • From above, P= -2 Qd + 12 • At a P = 6, Qd = 3 • Thus the 3rd Snickers is worth $6. • Likewise, we know that the addition of one more Snickers is only worth $4, Law of Diminishing 4 Change in Quantity Demanded 5 P Q D • Movement along the demand curve – Caused by a change in price Changes in Demand 6 • Demand ↑: Shift to right • Demand ↓: Shift to left P Q P 1 Q d 1 D D’ P Q D D’ • Demand more at every price level • Demand less at every price level Causes of Demand Changes • Five main factors that change demand are 1. The prices of related goods 2. Expected future prices 3. Income 4. Population 5. Preferences 7 Changes in Demand 1. Prices of related goods – Substitutes : Goods that are related to each other, i.e. Nike and Addidas • Definition: if the price increases for good 1 then the demand increases for good 2; shifts curve outward – Compliments : Goods that are used together, i.e. milk and cereal • Definition: the price increases for good 1 then the demand decreases for good 2; shifts curve inward 8 Changes in Demand 2. Expectations – Price expect price to rise → ↑ current demand expect price to fall → ↓ current demand – Income expect income to rise → ↑ D for normal goods and ↓ D for inferior goods 9 Changes in Demand 3. Income – Normal Good : goods where demand rises when income rises and falls when income falls – Inferior Good : goods where demand rises when income falls and demand falls when income rises 10 Changes in Demand...
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This note was uploaded on 02/23/2012 for the course ECONOMICS 251 taught by Professor Kelly during the Summer '11 term at Purdue.

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Ch 3 Demand and Supply - Demand and Supply Chapter 3 Demand...

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