Uwa Microeconomics Week 2

How Market Works:

1) Intro to demand and supply:

Law of demand: The rule that holding everything else constant, when the price of a product fall the quantity demanded of the product will increase and when the price of the product rises the quantity demanded decrease.

Explanation for this law:

Substitution effect:

The change in the quantity demanded of a good that results from a change in price, making the good more or less expensive relative to other substitute goods.

The income effect:

The change in the quantity demanded of a good that results from the effect of change in the goods price on consumer’s purchasing power.

Ceteris paribus “all else is equal”: The requirement that when analysing the relationship between two variable such as price and quantity demanded other variables must be held constant.

Shift of demand curve to left / right is change in demand, Shift along the curve is change in quantity demanded.

Variables that shifts market demand

* Income: The income that consumer have effects their willingness and ability to spend money on goods.

*AN INCREASE IN….*

Two types of goods:

Normal good: A good for which the demand for them increases as income rises and decreases as income falls.

Shift the demand curve to the right

Inferior good: A good for which the demand increases as income falls and decreases as income rises.

Shift the demand curve to the left

* Price of related goods:

The price of other goods can change the price of others,

Substitutes: goods and services that can be used for the same purpose.

Shift the demand curve to the right

Complements: Goods and services that are used together.

Shift the demand curve to the left

* Tastes:

Subjective elements that can influence a consumer’s decision in purchasing a good

Shift the demand curve to the right

* Population and demographics:

Demand for a particular product can increase and decrease depending on the age, race and gender population in the country...