rohlf_lecture4 - Demand and Supply Fundamental to...

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1 Demand and Supply Fundamental to understanding of economics Study the determination of prices and quantities in markets We will look first at demand, then at supply, and then put them together
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2 Determinants of demand The demand for a product depends on a number of factors First, it depends on the price of the product: Mathematically, Q 1 D = f(p 1 …) As an example, consider the following table that relates price and quantity
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3 EXHIBIT 3.1 Hometown Demand for Jogging Shoes
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4 Determinants of demand • Q 1 D = f(p 1 …) We usually plot these two variables in a graph:
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5 EXHIBIT 3.2 The Demand Curve for Jogging Shoes in Hometown, U.S.A.
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6 Downward sloping demand Note that demand is a downward sloping function of price Why? 2 reasons Income effect Substitution effect
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7 Downward sloping demand: income effect Income effect: as price falls the consumer can buy more of this good (and all goods) and thus becomes wealthier E.g. p of apples = $2; buy 10 and spend $20; if p of apples falls to $1, buy same 10 apples and spend only $10 – thus you have $10 left over to spend on more apples or more of other goods Substitution effect
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8 Downward sloping demand: substitution effect Substitution effect: since the relative price falls you substitute into this good and away from others E.g. Suppose p apples = $2 and p pears = $2 and you buy 10 apples and 10 pears. If p apples falls to $1, apples becomes a relatively cheap fruit and you probably substitute away from pears and into apples
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9 Determinants of demand: income A second determinant of demand is income Q 1 D = f(p 1 , income, …) Usually, higher income leads to a higher demand for a product If higher income increases demand for a product, the good is called a normal good If higher income decreases demand for a product, the good is called an inferior good
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10 Determinants of demand: income If higher income increases demand for a product, the good is called a normal good Graphically this results in a rightward shift of the demand curve
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11 EXHIBIT 3.3 Income as a Determinant of Demand
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Shifts versus movements along the curve You need to distinguish between shifts of a curve and movements along the curve If something changes that is not plotted on an axis of the graph, this causes a shift in
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rohlf_lecture4 - Demand and Supply Fundamental to...

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