Econ 103

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Higher gas prices should lower demand. How do you evaluate this statement?

One would think this statement to be true, but as gas prices rise, the demand for the gas does not change. Consumers still are in demand for the fuel due to traveling, commuting to work and school, etc. Also, in this day and age I feel consumers will pay higher gas prices due to the preference of wanting to drive their own vehicles then partaking in public transportation. Certain consumers are preparing in advance for the spike in gas prices by purchasing a vehicle that is fuel efficient, while others pay no mind to the rising prices.

What are the three reasons that law demand exists. Explain.

The three laws of demand are diminishing marginal utility, income effect and substitution effect.

Diminishing utility- Is described as, the more a consumer purchases an item, and their satisfaction will deteriorate over time. For example, I have a love of racing RC cars, as I buy more I become less satisfied because what I thought would be a better RC car turns out to be false. This causes me not being satisfied and my fulfilment of racing is not complete.

Income effect- Is the effect of a change in income, either directly or indirectly, changing the assumption of goods. For example, when a consumer has to change their cable package to a lower level due to a decrease in income, where before they had more than enough income to afford a $300 cable package that includes numerous extras.

Substitution effect- While prices increase on items and a consumer’s income decreases, that consumer will replace the more expensive item with a more cost friendly one. For example, a consumer might be brand loyal to Tide laundry detergent, but as the price increases and their income decreases the consumer will change to a more cost friendly brand such as generic. Staying within income…...

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