Supply And Demand - Chapter 3 Page 11
ADVERTISEMENT
1
2
3
4
5
6
7
8
9
10
11
12
13
14
15
16
17
18
19
20
21
22
23
24
25
26
27
28
29
30
31
32
33
34
35
36
3762
Part I: Preliminaries
incomes for buyers might cause the demand for ground chuck to decrease. For sim-
ilar reasons, we might expect that Greyhound bus tickets (in contrast to airline tick-
ets) and single-ply paper towels (in contrast to two-ply) are inferior goods.
A rise in income will increase the demand for a normal good, and decrease
the demand for an inferior good.
Wealth. Your wealth at any point in time is the total value of everything you own
Wealth
The total value of every-
thing a person or firm owns, at a
(cash, bank accounts, stocks, bonds, real estate or any other valuable property) minus
point in time, minus the total
the total dollar amount you owe (home mortgage, credit card debt, auto loan, student
value of everything owed.
loan, and so on). Although income and wealth are different, (see the nearby Dangerous
Curves box), they have similar effects on demand. Increases in wealth among buyers—
because of an increase in the value of their stocks or bonds, for example—gives them
more funds with which to purchase goods and services. As you might expect,
an increase in wealth will increase demand (shift the curve rightward) for a nor-
mal good, and decrease demand (shift the curve leftward) for an inferior good.
Prices of Related Goods. A substitute is a good that can be used in place of anoth-
Substitute
A good that can be
used in place of some other good
er good and that fulfills more or less the same purpose. For example, many people
and that fulfills more or less the
use real maple syrup to sweeten their pancakes, but they could use a number of
same purpose.
other things instead: honey, sugar, jam, or artificial maple syrup. Each of these can
be considered a substitute for real maple syrup.
When the price of a substitute rises, people will choose to buy more maple
syrup. For example, when the price of jam rises, some jam users will switch to maple
syrup, and the demand for maple syrup will increase. In general,
a rise in the price of a substitute increases the demand for a good, shifting
the demand curve to the right.
Of course, if the price of a substi-
Income versus Wealth
It’s easy to confuse income with wealth ,
tute falls, we have the opposite
because both are measured in dollars and both are sources of
result: Demand for the original
funds that can be spent on goods and services. But they are
good
decreases,
shifting
its
DANGEROUS
not the same thing. Your income is how much you earn per
CURVES
demand curve to the left.
period of time (such as, $20 per hour , $3,500 per month , or
There are countless examples
$40,000 per year ). Your wealth, by contrast, is the value of what
in which a change in a substitute’s
you own minus the value of what you owe at a particular moment in
time . (Such as, on December 31, 2005, the value of what you own is
price affects demand for a good. A
$12,000, but the value of what you owe is $9,000, so you have $3,000 in wealth.)
drop in the rental price of DVDs,
To help you see the difference: suppose you get a good job after you graduate, but
ceteris paribus, would decrease the
you have very little in the bank, and you still have large, unpaid student loans. Then
demand for movies at theaters. A
you’d have a moderate-to-high income (what you earn at your job each period), but your
rise in the price of beef, ceteris
wealth would be negative (since what you would owe is greater than what you own ).
paribus,
would
increase
the
demand for chicken.
A complement is the opposite of a substitute: It’s used together with the good
Complement
A good that is used
together with some other good.
we are interested in. Pancake mix is a complement to maple syrup, since these two
goods are used frequently in combination. If the price of pancake mix rises, some
consumers will switch to other breakfasts—bacon and eggs, for example—that
don’t include maple syrup. The demand for maple syrup will decrease.
ADVERTISEMENT
0 votes
Related Articles
Related forms
Related Categories
Parent category: Education