# Chapter 3 - ECON 1000

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Published on 12 Oct 2011
School
York University
Department
Economics
Course
ECON 1000
Professor
Markets and Prices
Markets are arrangements that enables buyers and sellers to get information and to do business with each other
Markets exist for goods and services
Some markets are places where people can meet physically
Others can be connected only via telephone, internet and fax
Sellers are the tens of thousands of retail sports equipment and footwear stores
Each buyer can visit different stores and each seller knows that the buyer has a choice of stores
A market that has many buyers and many sellers, so no single buyer or seller can influence the price
Competitive market:
Markets vary in intensity of competition that buyers and sellers face
Producers sell only if price is high enough to cover opportunity cost
Consumers respond to changing opportunity cost by seeking cheaper alternatives to expensive items
Referred to as money price
An object's price is the number of dollars that must be given up in exchange for it
Opportunity cost of one cup of coffee is two packs of gum
Relative price is an opportunity cost
The ratio of one price to another is called a relative price
To calculate: divide price of cup of coffee by price of pack of gum to find the ratio
Example: if money price of coffee is \$2 a cup and the money price of gum is \$1 a pack
Opportunity cost is the highest valued alternative forgone
Resulting relative price is the opportunity cost of the good in terms of "how much basket" we must give up
To calculate: divide money price of a good by money price of a basket of all goods ( price index)
Normal way of expressing relative price is in terms of a basket of all goods and services
They refer to relative price
Its price will fall relative to the average price of other goods and services
When a price will fall it is not the money price
Demand and supply model determines relative prices, and the word price means relative price
Demand
Wants it
Can afford it
If one demands something, one
Wants are desires or wishes one has for goods and services
Scarcity guarantees that most of our wants will never be satisfied
Demand reflects a decision about which want to satisfy
Not same as quantity bought
May exceed goods available so quantity bought is less than quantity demanded
Demand expressed as 1 cup per day, 7 cups per week, 365 cups per year
Example: one cup of coffee a day
Measured as an amount per unit of time
Quantity demanded of a good or service is the amount consumers plan to buy during a given time period at a particular price
Influenced by many factors, one is price
"How, other things remaining the same, does the quantity demanded of a good change as its price changes?"
Keep all other influences the same then ask
Study relationship between quantity demanded and its price
Law of Demand
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 the quantity
demanded
Can be explained by the following two effects
When the price of a good rises its relative price -- opportunity cost -- rises
Each good has substitutes -- other goods that can be used in its place
As opportunity cost of a good rises, incentive to economize on its use and switch to substitute becomes stronger
Substitution effect:
When price rises, it rises relative to income
High price & same income --> cannot afford to buy all things they previously bought
Income effect:
Energy bars can now substitute for energy drinks -- substitution effect
Budgets have more slack from the lower price so people buy more bars -- income effect
Example: an energy bar was at 3 ad falls to \$1.50
Energy bars are substituted with energy drinks -- substitution effect
Tighter budgets so people buy fewer energy bars -- income effect
Example: an energy bar was at \$3 now it doubles to \$6
Demand Curve and Demand Schedule
The entire relationship between price of a good and quantity demanded of that good
Illustrated by the demand curve and demand schedule
Demand:
Refers to a point of the demand curve
The quantity demanded at a particular price
Quantity demanded:
Demand curve shows relationship between quantity demanded and its price when all other influences on consumers' planned purchases remain the same
Demand schedule lists quantities demanded at each price when all other influences on consumers' planned purchases remain the same
Chapter 3 - Demand and Supply
October-11-11
1:59 PM
ECON 1000 Page 1
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Graphed as a demand curve with quantity demanded on x-axis and price on the y-axis
Demand schedule lists quantities demanded at each price when all other influences on consumers' planned purchases remain the same
Willingness and Ability to Pay
Another way to look at demand curve
A measure of marginal benefit
As quantity increases, marginal benefit of each additional unit falls and the highest price one is willing to pay falls
If small quantity available, highest price that someone is willing and able to pay for one more unit is high
Change in Demand
Factor that influences buying plans other than price changes, there is a change in demand
When demand increases, demand curve shifts rightward and quantity demanded at each price is greater
Six factors bring changes in demand:
Quantity that consumers buy depend on price of substitutes
If the substitute's price rises people buy less of it and more energy bars
Demand for energy bars increases
Example: if energy drink price rises, people buy fewer energy drinks and more energy bars
Complements are goods that are used in conjunction with another
If price of hour at gym falls, people buy more gym time and more energy bars
Example: hamburgers & fries, energy bars and exercise
Also depends on complements
Prices of related goods
People retime their purchases and substitute over time
Buy more now before price rises so demand for good today increases
If price rise in the future and good and be stored, opportunity cost of obtaining good for future use is lower today than it will be when price increases
Store freezer with enough juice for future
Current demand for orange juice rises and future demand falls
Example: if Florida frost damages orange crop, price in future will rise
If price falls in the future opportunity cost of buying good today is high relative to future so people buy later
Expected future prices
If income increases consumers buy more of most goods
Demand increases as income increases
Example: air travel
Normal good:
Demand decreases as income increases
Example: long-distance bus trips
Inferior good:
Income
If income rises in future or credit is easy to obtain, demand might increase now
Example: if salesperson knows they will get a big bonus at end of year, they go into debt and buy a new car now
Expected future income and credit
Demand depends on size and age of population
Larger population = larger demand for all goods and services
Example: GTA (pop. 5.6 million) has greater demand for goods and services than thunder bay (pop. 124,000)
Larger the proportion of population in an age group, greater the demand for goods and services used by age group
Demand for university places was similar
Example: 2.3 million 20-24 year olds in Canada in 2007 v. 2.4 million in 1987
Demand for nursing home services increased
Example: Over same period, number of Canadians age 85 and over increased 313,000
Population
Determine value that people place on each good and service
Example: can depend on weather, information, and fashion
Example: greater health and fitness awareness has shifted preferences in favour of energy bars, so demand for energy bars inc rease
Preferences
Change in Quantity Demanded Versus a Change in Demand
Change in the influence on buyers' plans bring a change in quantity demanded or a change in demand
Represents a change in quantity demanded
Example: if price of good falls, quantity demanded is greater --> down along demand curve
Movement along the curve
Represents change in demand
This shifts the curve to the right
More energy bars are demanded at each price
Example: more people work out at gym, more people buy energy bars
When you have greater income you want less of an inferior good
When you have greater income you want more of a normal good
For inferior goods, the effects of changes in income are opposite to normal good
Shift of demand curve
Supply
Has resources and technology to produce it
Can profit from producing it
Plans to produce and sell it
If a firm supplies a good or service, the firm
Resource and technology are constraints that limit what is possible
Only produced if profitable
Many useful things can be produced
Supply is more than resources and technology to produce something
Reflects a decision about which technologically feasible items to produce
Quantity supplied:
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