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Chapter 3 - ECON 1000

5 Pages

Course Code
ECON 1000
Sam Lanfranco

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Chapter 3 Demand and SupplyOctober1111159 PMMarkets and PricesMarkets are arrangements that enables buyers and sellers to get information and to do business with each otherMarkets exist for goods and servicesSome markets are places where people can meet physicallyOthers can be connected only via telephone internet and faxMost markets are unorganized collections of buyers and sellersIn the basketball shoe market there are buyers and sellersSellers are the tens of thousands of retail sports equipment and footwear storesEach buyer can visit different stores and each seller knows that the buyer has a choice of storesMarkets vary in intensity of competition that buyers and sellers faceCompetitive marketA market that has many buyers and many sellers so no single buyer or seller can influence the priceProducers sell only if price is high enough to cover opportunity costConsumers respond to changing opportunity cost by seeking cheaper alternatives to expensive itemsAn objects priceis the number of dollars that must be given up in exchange for itReferred to as money priceOpportunity costis the highest valued alternative forgoneExample if money price of coffee is 2 a cup and the money price of gum is 1 a packOpportunity cost of one cup of coffee is two packs of gumTo calculate divide price of cup of coffee by price of pack of gum to find the ratioThe ratio of one price to another is called a relative priceRelative price is an opportunity costNormal way of expressing relative price is in terms of a basket of all goods and servicesTo calculate divide money price of a good by money price of a basket of all goods price indexResulting relative price is the opportunity cost of the good in terms of how much basket we must give upDemand and supply model determines relative prices and the word price means relative priceWhen a price will fall it is not the money priceThey refer to relative priceIts price will fall relative to the average price of other goods and servicesDemandIf one demands something oneWants itCan afford itPlans to buy itWants are desires or wishes one has for goods and servicesScarcity guarantees that most of our wants will never be satisfiedDemand reflects a decision about which want to satisfyQuantity demandedof a good or service is the amount consumers plan to buy during a given time period at a particular priceNot same as quantity boughtMay exceed goods available so quantity bought is less than quantity demandedMeasured as an amount per unit of timeExample one cup of coffee a dayDemand expressed as 1 cup per day 7 cups per week 365 cups per yearInfluenced by many factors one is priceStudy relationship between quantity demanded and its priceKeep all other influences the same then askHow other things remaining the same does the quantity demanded of a good change as its price changesLaw of DemandOther 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 demandedCan be explained by the following two effectsSubstitution effectWhen the price of a good rises its relative price opportunity cost risesEach good has substitutes other goods that can be used in its placeAs opportunity cost of a good rises incentive to economize on its use and switch to substitute becomes strongerIncome effectWhen price rises it rises relative to incomeHigh pricesame incomecannot afford to buy all things they previously bought Examplean energy bar was at 3 ad falls to 150Energy bars can now substitute for energy drinks substitution effectBudgets have more slack from the lower price so people buy more bars income effectExample an energy bar was at 3 now it doubles to 6Energy bars are substituted with energy drinks substitution effectTighter budgets so people buy fewer energy bars income effectDemand Curve and Demand ScheduleDemandThe entire relationship between price of a good and quantity demanded of that goodIllustrated by the demand curve and demand scheduleQuantity demandedRefers to a point of the demand curveThe quantity demanded at a particular priceDemand curve shows relationship between quantity demanded and its price when all other influences on consumers planned purchases remain the sameDemand schedule lists quantities demanded at each price when all other influences on consumers planned purchases remain the same ECON 1000 Page 1
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