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
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
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.
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 Expected future income and credit
Prices of Related Goods
A substitute is a good that can be used in place of another good.
Mac or PC