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Lecture

Chapter 3 Notes.docx


Department
Economics
Course Code
ECON 1021A/B
Professor
Jeannie Gillmore

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Chapter 3 Notes
Markets and Prices
a competitive market is a market that has many buyers and many sellers, so no
single buyer or seller can influence the price
producers offer items for sale only if the price is high enough to cover their
opportunity cost
o consumers will respond to changing opportunity costs by seeking cheaper
alternatives to expensive items
the money price is the price of an object in dollars that must be given up in exchange
for it
the relative price is the ratio of one price to another
o the relative price is also the opportunity cost
Demand
if you demand something, then you WANT IT, CAN AFFORD IT, and PLAN TO
BUY IT
the quantity demanded of a good or service is the amount that consumers plan to
buy during a given period at a particular price
o measured as an amount per unit time (e/x one cup of coffee per day, or seven
cups of coffee per week)
the law of demand states:
o 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
a higher price reduces the quantity demanded for two reasons:
o substitution effect
when the price of a good rises, other things remaining the same, its
relative price rises as well
creates an incentive to switch to a substitute
o income effect
when the price rises, other things remaining the same, the price rises
relative to income
faced with a higher price and an unchanged income, people cannot
afford to buy all the things the previously bought
must decrease the quantities demanded of some goods or services
people will buy less of the good that has had its price increased
when any factor that influences buying plans changes, then there is a change in
demand
o when demand increases, the demand curve shifts to the right
Factors Affecting Changes in Demand
price of related goods
o a substitute is a good that can be used in place of another good
e/x a train ride as opposed to a bus ride
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o if the price of a substitute rises, the quantity demanded of the original
increases
o a complement is a good that is used in conjunction with another good
if the price of an object falls, the demand for it as well as its
compliment increases
expected future prices
o if it is expected that the price of a good is going to go up in the future, the
opportunity cost of buying it today is lower today
o they will buy more now, thus demand increases
o if it is expected that the future price is going to fall, the opportunity cost of
buying today goes up
o they buy less now, demand lowers
income
o when income increases, consumers buy more (same with the opposite)
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
expected future income and credit
o if it is expected that income or credit is going to increase, people MIGHT buy
more now
population
o the larger the population, the greater the demand for all goods or services
preferences
o demand depends on preferences
Movement Along/Shifts of the Demand Curve
a point on the demand curve shows the quantity demanded at a given price, so a
movement along the demand curve shows a change in the quantity demanded
o if the price of the good changes, but no other influence on buying plans
changes, then we illustrate the effect of the price change as a movement along
the curve
if the price of a good remains constant, but some other influence on buying plans
changes, there is a change in demand for that good
o illustrated through a shift in the demand curve
increase in demand shifts the curve right
decrease in demand shifts the curve left
Supply
if a firm supplies something, the firm HAS THE RESOURCES AND
TECHNOLOGY TO PRODUCE IT, CAN PROFIT FROM PRODUCING IT, and
PLANS TO PRODUCE IT AND SELL IT
o resources and technology are the constraints that limit what is possible
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
o quantity supplied is not always the same as the quantity sold
the law of supply states:
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