Microeconomics Review

Economics Exam Notes
Micro Economics
DEMAND
The nature of markets
• A market is where buyers and sellers come together to carry out an economic transaction
The law of demand
• The law of demand states that “as the price of a product falls, the quantity demanded of the product will usually increase, ceteris paribus” o Ceteris paribus is an assumption that means “all other things being equal”
The demand curve The non-price determinants of demand
• There are many factors that determine demand and lead to an actual shift of the demand curve either to the left or to the right. These are seen below: o Income
 Normal Goods
• For most goods, as income rises, the demand for the product also rises. These are normal goods. As income rises the demand curve for a normal good will shift to the right. The size of the shift in demand depends on the good itself.
 Inferior Goods
• If a product is called inferior it is because demand for the product will fall as income rises, and consumers start buying higher priced substitutes in place of the inferior goods. When income gets to a certain level the consumer will only be buying higher priced goods and the demand for the inferior good will be zero. o The price of other products
 Substitutes
• If products are substitutes for each other then a change in the price of one of the products will lead to a change in demand for the other product.
 Complements
• Complements are products that are often purchased together. If products are complements to each other, then a change in the price of one of the products will lead to a change in the demand of another.
 Unrelated Goods
• If products are unrelated, then a change in the price of one product will have no effect upon the demand for the other product. o Tastes/ Preferences
 Change in consumer tastes and preferences may lead to an increase in demand for a product, moving its demand curve to the right, or may decrease demand for a product moving its demand curve