September 25 Readings/Class Notes – Economics
Competitive market – a market that has many buyers and many sellers – no single
buyer or seller can influence the price.
Money price – the number of dollars that must be given up in an exchange for an
Relative price – the relationship of one price to another – relative price is an
How to express a relative price: divide the money price of a good by the money
price of a “basket” of all goods (called a price index)
Result tells us the opportunity cost of the good – how much of the “basket” we
much give up to buy it.
If you demand something, you: want it, can afford it, and plan to buy it.
Quantity demanded – amount that consumers plan to buy during a given time
period at a particular price.
Law of demand – other things remaining the same, the higher the price of a
good, the smaller is the quantity demanded; and the lower the price of a good,
the greater the quantity demanded.
Substitution effect – price of a good rises, other things can be used in its place
Income effect – when a price rises, people cannot afford to buy all the things they
previously bought – may decrease quantity of goods and services demanded.
Demand schedule – list the quantities demanded at each price when all the
other influenes on consumers' planned purchases remain the same.
Willingness and Ability to Pay
– A measure of marginal benefit.
– Small quantity of something – price someone is willing and able to pay for
one more unit is high.
– If the quantity increases, the marginal benefit of each additional unit falls,
the highest price someone is willing to pay also falls.
– Change in demand – happens when any factor that influences buying plans
changes other than the price of the good
Six main factors bring changes in demand
– prices of related goods – expected future prices
– expected future income and credit
Prices of related goods
substitute – good that can be in place of another good eg. Bus ride or train ride
– if the price of a train ride increases, people will buy more of the substitute
complement – hamburgers and fries – if the price of a hamburgers d