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Chapter 3 Notes on Econ 1A- the prices and quantities of goods and services are determined by interactions in the market-demand curve graphs the quantity of a good that buyers wish to buy at each price-why demand curve is downward sloping?-buyer’s reaction to a price change-substitution effect-the change in quantity demanded because buyers switch to or fromsubstitutable goods when the prices changes-income effect-the change in quantity demanded (Qd) because change in price changesthe buyer’s purchasing power)-difference in buyer’s reservation prices-consumers are different in terms of how much they are willing to pay for thegoods-buyer’s reservation prices – the largest dollar amount the buyer is willing to pay for the goods-seller’s reservation price – the smallest dollar amount the seller would be willing to charge for an additional unit of the good-interpretations of demand curves-horizontal interpretation-start from the vertical axis (P) to the horizontal axis (Q)-how much of the good is demanded at a given price?-vertical interpretation-start from the horizontal axis to the vertical axis-how much the buyer wants to pay at a given quantity?-the reservation price of the marginal buyer at a given quantity-interpretation of supply curves-horizontal interpretation-at a certain level of price, how many products sellers wish to sell-vertical interpretation-the seller’s reservation price at a given level of Qs-when the market is in equilibrium, no incentive to move away from the equilibrium-Changes in demand-when there is an increase in demand, the demand curve shifts to the right-when there is a decrease in demand, the demand curve shifts to the left
 
-6 factors that shift demand curve-change in price of a complementary good-2 goods are “complements” if a price of one good decreases, demand for theother good increases (or price of one good increases, demand for the other gooddecreases)-change in price of a substitutable good-two goods are “substitutes” if increase in price of one good, demand for the gooddecreases (demand decrease, price decreases, and quantity decreases)-change in buyer’s income-normal good – increase in buyer’s income causes demand for normal good toincrease-(Equilibrium Price increases and Equilibrium Quantityincreases)-inferior good – increase in buyer’s income causes demand for inferior good todecrease-change in buyer’s preference or taste-demand increases which causes price and quantity to increase-change in population of potential buyers-demand increases the price and quantity increases-an expectation of price change in future-decrease in demand causes decrease in prices and quantity-changes in supply- when there is an increase in supply, the supply curve shifts to the right- when there is a decrease in supply, the supply curve shifts to the left
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