17 terms

# Macro Chapter 4

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Law of Demand
sttates that the quantity of a good demanded is inversely related to the good's price.
ergo:
Quantity demanded rises as price falls, other things constant.
Quantity demanded falls as price rises, other things constant.
demand curve
graphic representation of the relationship between price and quantity demanded. Price and quantity are inversely related, so the curve is sloped downward.
"other things constant"
places a limitation on the application of the law of demand.
demand
refers to a schedule of quantities of a good that will be bought per unit of time at various prices, other things constant.
- refers to the entire demand curve
- tells us how much will be bought at various prices
quantity demanded
refers to a specific amount that will be demanded per unit of time at a specific price, other things constant.
-tells us how much will be bought at a specific price and refers to a specific point on the demand curve.
movement along a curve
the graphical representation of the effect of a change in price on the quantity demanded.
-change in price causes movement along the curve
shift in demand
graphical representation of the effect of anything other than price on demand.(affects entire curve)
- a change in a shift factor causes a shift in the demand.
Shift Factors of Demand:
1) Society's Income
2) The Prices of Other Goods
3) Tastes
4) Expectations
5) Taxes on and subsidies to consumers
1) Society's Income
As income rises, demand for normal goods increase. For inferior goods, as income rises, demand decreases.
2) The Prices of Other Goods
B/c people make their buying decisions based on the price of related goods, demand will be affected by the prices of other goods.
substitutes: When one good is easily substituted for another- when the price of a substitute rises, the demand for the good whose price has stayed the same will increase.
complements: when one good typically goes with another- when the price of a good declines, the demand for it's complement rises.
3) Tastes
changes in taste can affect the demand for a good without a change in price.
4) Expectations
expectations change people's willingness to buy. If a person expects to have a higher income, they will spend more. If a person expects the price of a good to fall soon, they will wait and buy later.
5) Taxes on and subsidies to consumers
taxes increase the cost of goods to consumers therefore reducing the demand for those goods.
subsidies have the opposite effect- with tax breaks or incentives offered, the demand increases.
The demand curve represents the maximum price that an individual will pay- T or F?
T
market demand curve
horizontal sum of all individual demand curves
For the market, the law of demand is based on 2 phenomena:
1) At lower prices, existing demanders buy more
2)At lower prices, new demanders enter the market.
Supply of produced goods involves a much more complicated process than demand and is divided into analysis of factors of production and the transformation of t
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