ECON 300 EXAM #1 REVIEW-WELLS-SPRING 2012

I. COMPETITIVE MARKETS

Law of Demand-If we have an increase in the price of the item the quantity demand will decrease OR P? ? QD?

Positive Economic Theory-Testable

Normative Economic Theory-Opinion, subjective, not testable

3 REASONS WHY LAW OF DEMAND HOLDS:

Utility-level of satisfaction

Marginal utility-the extra satisfaction from consuming one more unit.

1. Law of diminishing marginal utility-As people consume more of anything they get less and less extra satisfaction and therefore they are willing to pay less for additional units.

2. Substitution Effect-As prices go up, other products become relatively cheaper, therefore there is a decrease in quantity demanded.

3. Income effect-As price increases, you can't afford as much and...