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Questions and Answers
What effect does an increase in income have on the demand for normal goods?
If the price of coffee increases, what is the likely effect on the demand for tea, assuming they are substitutes?
What happens to the demand for second-hand clothes when consumer income rises?
How do natural disasters typically affect market demand?
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What is the substitution effect?
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What is the substitution effect?
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What happens to the demand curve when there is an increase in demand?
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How does a change in a consumer's income affect the demand for normal goods?
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What is the income effect?
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What is likely to happen to the demand for inferior goods when consumer incomes rise?
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Study Notes
Shifting the Demand Curve
- Factors that affect demand and change the entire demand curve:
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Income:
- Normal good: Increase in demand with higher income, decrease in demand with lower income (e.g., new clothes).
- Inferior good: Increase in demand with lower income, decrease in demand with higher income (e.g., second-hand clothes).
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Prices of related goods:
- Substitutes: Increase in price of one good leads to an increase in demand for the substitute (e.g., Coke and Pepsi).
- Complements: Increase in price of one good leads to a decrease in demand for the complement (e.g., toothbrushes and toothpaste).
- Tastes: Changes in consumer preferences can influence demand (e.g., influencers promoting reusable water bottles).
- Population and demographics: Shifts in demographics can influence demand (e.g., changing age groups impacting demand for certain goods).
- Expected future prices: Expectations about future prices can affect current demand.
- Natural disasters and pandemics: Disruptions caused by these events can impact demand for particular goods.
- Congestion: Higher congestion due to traffic or increased demand can impact demand for certain products (e.g., public transportation).
- Network effect: The value of a good increases with the number of users (e.g., social media platforms).
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Income:
Changes in Supply
- Factors that affect supply and change the entire supply curve:
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Prices of Related Goods in Production:
- Substitutes in production: Increase in price of one good can lead to a decrease in supply of a substitute product (e.g., corn and soybeans).
- Complements in production: Increase in price of one good leads to an increase in supply of a complement product (e.g., beef and leather).
- Number of firms: More firms lead to increased supply, fewer firms lead to decreased supply.
- Expected future price: Anticipating higher future prices can lead to a decrease in current supply to increase supply later.
- Natural disasters and pandemics: Disruptions to production (e.g., factory damage) reduce supply.
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Fracking and U.S. Oil Boom: Fracking technology spurred a major increase in U.S. oil production.
- During periods of low prices, producers often reduce current supply to increase it later when prices are expected to recover (e.g., oil market during the Covid-19 pandemic).
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Prices of Related Goods in Production:
Market Equilibrium
- Market equilibrium occurs when quantity demanded equals quantity supplied.
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Description
Test your knowledge on the factors that shift the demand curve in economics. This quiz covers concepts like normal vs. inferior goods, the impact of related goods, and changes in consumer preferences. Enhance your understanding of how demographic changes and future price expectations can influence demand.
