ECO 8-29-07 - Relative price of High quality= (4/3) 4. P H...

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Econ 8/29/07 1. Law of Demand a. Demand curve represents ones maximum willingness to pay (marginal value) i. Diminishing marginal value is reflected in demand ii. Substitution is reflected in demand iii. Maximization is also taking place 1. When the individual is in equilibrium, the market value=price= relative price 2. To find quantity demanded, find price horizontally across to demand curve and follow down… iv. No exceptions to the law of demand v. Applications of L.O.D. 1. Insulin 2. Seat Belt vi. Moral Hazard 1. Individual Action is clouded by the actions of nature 2. Actions have to be unobservable 2. Relative Prices a. Ex: 2 types of oranges i. High Quality (H) ii. Low Qualtiy (L) iii. P H = $1 iv. P L = $0.50 v. The relative Cost of 1 high quality orange is 2 low quality oranges vi. It costs $1 to ship oranges to the north west 1. P H =$2 2. P L =$1.50 3.
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Unformatted text preview: Relative price of High quality= (4/3) 4. P H is just 1.33 low quality rather than 2 vii. Relative price in Florida is only $2, no shipping b. A fixed charge to a high and low quality good lowers the relative price of the high quality good 3. Shifting the Demand Curve a. If the price of good X goes up i. If good Y is a substitution, demand curve for good X will move up ii. If good Y is a compliment, demand curve for good X will go down iii. If income (M) goes up, and good X is normal, then the demand curve for X will go up iv. If M goes up, and good X is inferior, then the demand curve for X will go down v. Note: this is a shift in the demand curve, not a change in quantity demanded vi. An increase in Demand relates to a shift in the demand curve...
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This note was uploaded on 04/07/2008 for the course ECO 2302 taught by Professor Smith during the Spring '08 term at University of Texas at Dallas, Richardson.

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