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Lecture #5 - Sept 26.docx

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Western University
Economics 1021A/B
Michael Parkin

Economics – Lecture #5 Markets and Prices Market – any arrangement that enables buyers and sellers to get information Competitive Market – a market that has many buyers and many sellers so no single buyer or seller can influence the price Money Price – the amount of money needed to buy it Relative Price – the ratio of its money price to the money price of the next best alternative good – its opportunity cost Demand If you demand something, then you… 1. Want it, 2. Can afford it (could buy it if you chose to) 3. Have made a definite price to buy it Quantity Demanded – the amount of a good that consumers play to buy during a particular time period The Law of Demand The law of demand states: 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 larger is the quantity demanded. Results from substitution effect, and the income effect Substitution effect When the relative price (opportunity cost) of a good or service rises, people seek substitutes for it, so the quantity demanded of the good or service decreases. Income effect When the price of a good or service rises relative to income, people cannot afford all the things they previously bought, so the quantity demanded of the good or service decreases.  We need to find a way to save money if our income decreases Demand Curve and Demand Schedule The term demand refers to the entire relationship between the price of the good and quantity demanded of the good. A demand curve shows the relationship between the quantity demanded of a good and its price when all other influences on consumers’ planned purchases remain the same.  Price is on the y-axis  Quantity demanded is on the x-axisA rise in the price, other things remaining the same, brings a decrease in the quantity demanded and a movement along the demand curve. Willingness and Ability to Pay A demand curve is also a willingness-and-ability-to-pay curve. The smaller the quantity available, the higher is the price that someone is willing to pay for another unit. Willingness to pay measures marginal benefit.  There are some goods that rich people want to buy because they want to show off how much money they have o This is not true, because if the price rises, there will be less people able to buy the certain good A Change in Demand When some influence on buying plans, other than the price of the good changes, there is a change in demand for that good. The quantity of the good that people plan to buy changes at each and every price, so there is a new demand curve When demand increases, the demand curve shifts rightward. When demand decreases, the demand curve shifts leftward.  If only the price or quantity changes, there is just a shift along the demand curve Six main factors that change demand are… o The prices of related goods o Expected future prices o Income o Expected future income and credit o Population o Preferences Prices of Related Goods A substitute is a good that can be used in place of another good.  Mac or PC
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