AP Micro 2.1 Demand

MARKETS AND PROPERTY RIGHTS

Market: Forms when multiple parties exchange things of value

Property Rights: Exclusive(Only yours), Enforceable(Police), Transferrable(exchange)

LAW OF DEMAND

Raise Price —>Quantity Demand down

Lower Price—>Quantity Demanded up

*Only applicable for Normal goods

Demand(all else equal, relationshp between price and quantity demanded) v. Quantity Demanded

MARKET DEMAND AS THE SUM OF THE INDIVIDUAL DEMAND

Assume there are 2 buyers. Plot the total demand(Buyer 1 + Buyer 2 quantity demanded) at each quanity/price(graph)

SUBSTITUTION AND INCOME EFFECTS AND THE LAW OF DEMAND

Substitution Effect: If price goes down, they may substitute what they were going to previously buy with the item that got cheaper(Looks more attractive since it’s more affordable)

Income Effect: If price goes down, they can afford more of everything

Decreasing MU: As you have more and more candy, the MU decreases(Law of Diminishing utility)

PRICE OF RELATED PRODUCTS AND DEMAND

Price of related products: Other ebooks(substitutes) price up, then my ebook will be more desirable and shift curve right.

Kindle(compliment, not a substitute) Price goes up: would lower quantity demanded of my ebook since you need a kindle to read an ebook

CHANGE IN EXPECTED FUTURE PRICES AND DEMAND

Expectations of future prices: People expect future price to go up, probably buy it now vs later—>current demand(quantity demanded x price) goes up

CHANGES IN INCOME, POPULATION, OR PREFERENCES

Assuming all factors are held constant besides price and quantity demanded then you can use the model of the curve.

NORMAL AND INFERIOR GOODS
Normal: Price is high—> quanity low, Price low—>Quantity low

Income: Goes up—>At any price point, quantity demanded increases, Goes down—>At any price point, quantity demanded decreases

*Acts the way you would expect
Inferior Goods: Price is high—>Quantity low, Price low—>Quantity low

Income: Goes up—>demand goes down(shift left), Goes down—>Demand goes up(shift right)

If they have a better budget, they want to buy better goods, not inferior—-When income goes down, they usually have to buy cheaper, inferior good

CHANGE IN DEMAND VS CHANGE IN QUANTITY DEMANDED

Quantity demanded: particular point, Demand: whole curve

How to determine a change: take a point, see how it is affected. If new point is along curve, it’s a change in QD, not demand. If it is off the curve, it likely shifts the demand. When it’s true for any given price, it will shift the curve.