ECON 110- Week Three Notes
ECON 110- Week Three Notes ECON 110
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This 3 page Class Notes was uploaded by Connor Workman on Friday January 22, 2016. The Class Notes belongs to ECON 110 at Brigham Young University taught by Professor Arden Pope in Winter 2016. Since its upload, it has received 24 views. For similar materials see Principles of Economics in Economcs at Brigham Young University.
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Date Created: 01/22/16
ECON 110 KEY o <L1>= Lecture 1, </L1>= End of Lecture 1 o <L2>= Lecture 2, </L2>= End of Lecture 2 o * = Important for exams/quizzes. o <L7> Quiz What is your name? What happens to the price of a given good when the price of a substitute for that goes up? How to understand movements and shifts on the demand curve. * Consider a graph with the x-axis being demand, and the y-axis being price (right). As price increases, demand decreases (for a normal good). o This graph is holding income and tastes and preferences as constant. Review of compliments versus substitutes o As the price of a compliment goes up, the demand of both goods goes down. As the price of a substitute goes up, the demand of the other substitute goes up. o Note: Professor Pope is so old that hotdog buns weren’t invented when he grew up. Normal versus inferior goods o A Normal good is a good where a demand shifts out when income goes up (as seen on line 1 on the graph to the left). As income goes up, you want to buy more of a good. o An Inferior good is a good where a demand shifts in when income goes up (as seen at y3 on the graph to the left). An example of this is Ramen noodles. As income goes up, you don’t want to buy as many noodles, and you can afford better foods. Therefore, the demand on noodles goes down. o Generally speaking, goods start out as normal goods, and then progress to inferior goods. A bicycle is a normal good until income increases enough to buy a car. A car is a normal good until income increases enough to buy a jet. Back to the demand curve! o What will happen to the demand curve if the income goes up? Normal or inferior? Normal good- The graph shifts up. Inferior good- The graph shifts down. Tastes and Preferences o If your tastes and preferences change such that you like the good more, the demand curve shifts up. If they change such that you don’t like the good more, the demand curve shifts down. Fun thing (he wants to talk about for a minute) o When the price of a good goes up, the income and substitution effect have to be considered. o Normal good: When the price of a good goes up, the substitution and income effect dictate that you buy less. o Inferior Good: When the price of a good goes up, the substitution effect dictates you to buy less, and the income effect dictates that you buy more The vast majority of goods, the substitution effect will dominate the income effect, so the curve will be down-sloping. A giffen good is a good that is so inferior and important, that when the price of the good goes up, people demand more of it. When the price of the good goes down, people buy less of it. Income dominates substitution effect. Usually in very low income locations. **MAKE SURE YOU UNDERSTAND the shifts in the demand curve. o </L7> o <L8> Continuation of demand curves Comparing demand-income curves depending on the consumer. A summation of all of the individual demand curves in a market system is called a market demand curve. These curves show how the price related to market demand, which would be a useful tool in developing a business plan. Note from the author: This is really cool! Think if you were thinking of starting a business. If you sent out an electronic survey that had enough participants, you could collect this data (tastes and preferences/price willing to pay/how often you’re willing to pay it) and use it to determine if you have a viable business plan. Questions In the market for Chimero’s, what happens when the price of Chimero’s go up? o There is no shift in the demand curve. You move up on that demand curve, and demand will go down. o What if the price goes down? You’ll shift along the demand curve, so that demand increases. o What if the price of Ford Mustangs goes up? This is a substitute for the Chimero, so the demand curve will shift out. o What if the price of Toyota Camry’s goes up by the same amount as Mustangs? It will shift the demand curve, but not as much as the Mustang. o What happens if the price of gasoline goes up? The demand for all muscle cars goes down, shifting the demand curve. o **IMPORTANT: The demand curve ‘shifts’ when the other products or variables affect the product in the demand curve. Demand moves along the demand curve (does not shift) when only the two variables/product are affected. o What if average income goes up? It depends if it is an inferior good or normal good (this depends entirely on tastes and preferences. It could be considered a normal or inferior good. Some people might buy more Lamborghini’s). o </L8>
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