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Lecture

Microecon 1021A - Chapter 3

6 Pages
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Department
Economics
Course Code
Economics 1021A/B
Professor
Ronald Wintrobe

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Description
Chapter 3 Demand and Supply Markets and Prices • A competitive market is a market that has many buyers and many sellers, so that no single buyer or seller can influence the price. • The ratio of one price to another is called a relative price, and a relative price is an opportunity cost. Demand • The quantity demanded is the amount of a good or service that consumers plan to buy in a given time period at a particular price. • 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 greater is the quantity demanded. • Demand refers to the entire relationship between the price of the good and the quantity demanded of the good. • Demand is illustrated by a: o Demand schedule o Demand curve • 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. • When any factor that influences buying plans other than the price of the good changes, there is a change in demand. • There are six key factors that change demand: 1. The prices of related goods o A substitute is a good that can be used in place of another good. If the price of a substitute rises, people buy less of the substitute and more of the other good. o A complement is a good that is used in conjunction with another good. If the price of a donut, a complement of coffee, rises, people buy less coffee. 2. Expected future prices 3. Income o A normal good is one for which demand increases as income increases. o An inferior good is one for which demand decreases as income increases. 4. Expected future income and credit 5. Population 6. Preferences • When demand increases, the demand curve shifts rightward and when demand decreases, the demand curve shifts leftward. • The figure below shows the distinction between a change in the quantity demanded and a change in demand. • When the price of a good changes, there is a change in the quantity demanded, which is shown by a movement along the demand curve. • When any other influence on buying plans changes, there is a change in demand, which is shown by a shift of the demand curve. Supply • The quantity supplied of a good or service is the amount that producers plan to sell during a given time period at a particular price. • The law of supply states: Other thing remaining the same, the higher the price of a good, the greater is the quantity supplied; and the lower the price of a good, the smaller is the quantity supplied. • Supply refers to the entire relationship between the quantity supplied and the price of a good. • Supply is illustrated by a: o Supply schedule o Supply curve • A supply curve shows the relationship between the quantity supplied of a good and its price when all other influences on producers’ planned sales remain the same. • When any factor that influences selling plans other than the price of the good changes, there is a change in supply. • There are six key factors that change supply: 1. The prices of factors of production 2. Prices of related goods produced o Substitutes in production are goods that can be produced by using the same resources. o Complements in production are goods that must be produced together. 3. Expected future prices 4. The number of suppliers 5. Technology 6. The state of nature • When supply changes, the supply curve shifts. • When supply increases, the supply curve shifts rightward and when supply decreases, the supply curve shifts leftward. • The figure below shows the distinction between a change in the quantity supplied and a change in supply. • When the price of a good changes, there is a change in the quantity supplied, which is sh
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