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basic Demand notes

By Amanda Cook,2014-10-29 11:44
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ECONOMICS

    When the price of a good changes, there is a movement along the demand curve and there is a new quantity demanded.

Price

     P1

     P2

     D

     Q1 Q2 Quantity

    When other factors besides price change, this can cause a “change in demand.” In other words, at every price, the quantity demanded has changed.

    Graphically, this is represented by a shift in the demand curve.

Price

     P1

     D2

     D1

     Q1 Q2 Quantity

Factors that can cause the entire demand curve for a good to SHIFT:

    !!This list is not exhaustive it is only meant to give you some general factors that you may

    be able to apply to many different circumstances!!

; Population growth

; Changing tastes

; Expectations about future prices

    ; Price of other goods: a) substitute goods; b) complementary goods For both, give a definition and an example, then draw the appropriate examples

Substitute goods:

Example:

Complementary goods:

Example:

; Income of consumers: a) normal goods; b) inferior goods

    For both, give a definition and an example, then draw the appropriate examples

Normal goods:

Example:

Inferior goods:

Example:

When could the demand curve slope upwards? (HIGHER LEVEL ONLY)

    Veblin goods these are also known as ostentatious goods. The quantity demanded of these goods may increase as their price rises because they are desirable from a status perspective (very expensive watches, cars, etc.) However, though some

    people may buy more of these things at higher prices, we have to keep in mind that the total demand for these goods will likely fall as their price rises, so that Veblin goods are not really an example that breaks the law of demand

    Giffen goods these are goods that are so vital for living that when they become more expensive people may in fact buy more of them because even buying a small amount reduces their real income so much that they don’t buy other things – in other

    words the income effect is much greater than the substitution effect. People can’t substitute away from Giffen goods and their real income declines so much when Giffen goods become more expensive that people buy fewer other things and put more money into the Giffen goods, despite their increased price. Again, there aren’t

    real examples of this.

EXERCISES:

    Explain and illustrate (draw) how the following conditions would affect the demand for a music CD (ceteris paribus all other things being equal). An increase in

    demand would cause the demand curve to shift to the right, a decrease in demand would cause the demand curve to shift to the left. Complete in pencil.

1) The band recorded on the CD becomes more fashionable.

    2) The price of a similar band’s CD falls.

    3) Incomes rise (CD is a normal good).

    4) Consumers expect that the price of the CD will decrease in the near future. 5) The price of CD players falls.

Could this statement be true? Explain.

    “The price of houses has risen, but the demand has stayed the same.”

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