Demand Model

Macroeconomics demand

What do models do?

Identify the assumptions

What is the definition of a model?

It is a representation of a relationship or theory.

What do models represent?

Stories, graphs, and equations.

What are the characteristics of a good model?

It is clear, it predicts accurately, it improves communication, and it is useful.

What are assumptions about demand models?

markets are competitive, people are rational, about an instant in time, and it looks at a single shock.

What is the definition of a demand curve?

The quantity that an individual is willing and able to purchase at various prices, all other factors held constant.

What are other factors held constant?

Income, prices of related goods and services, tastes and preferences (demographics), expectations, economic environment, and the number of buyers.

What are substitutes?

Goods that can be swapped if the price of one is too high.

How do you determine a substitute on a graph?

They shift to the right.

What are complements?

Goods that go well together.

How do you determine a complement on a graph?

They shift to the left.

What is a normal good?

A good that the average household can buy.

What is an inferior good?

A good that is bought when people are struggling financially.

What is the relationship between income and demand for a normal good?

They are proportional. When income rises, demand rises and vice versa.

What is the relationship between income and demand for an inferior good?

They are disproportional. When income rises, demand falls and vice versa.

What shifts individual demand curves?

Complements and substitutes, normal and inferior goods, expectations of future prices, tastes and preferences, and government intervention.

What shifts the market demand curve?

The number of buyers.