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chapter 3

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ECON 1000
Sadia Mariam Malik

Chapter 3 Markets and Prices • Amarket is any arrangement that enables buyers and sellers to get information and do business with each other. • A competitive market is a market that has many buyers and many sellers so no single buyer or seller can influence the price. • The money price of a good is the amount of money needed to buy it. • The relative price of a good—the ratio of its money price to the money price of the next best alternative good( equals to its opportunity cost) . Demand • Wants are the unlimited desires or wishes people have for goods and services. Demand reflects a decision about which wants to satisfy. • The quantity demanded of a good or service is the amount that consumers are willing and able to purchase during a particular time period, and at a particular price. (when price increase, the demand drops/ negative relationship) 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. The law of demand results from: • Substitution 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. (eg: the price of tea goes up, the demand of coffee will increase) • Income effect: 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. 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. (The demand changes because of other things, but the quantity demand changes because of the price.) Ademand 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. Willingness and Ability to Pay • Ademand 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. AChange 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 . Six main factors that change demand are • The prices of related goods • Expected future prices: If the price of a good is expected to rise in the future, current demand for the good increases and the demand curve shifts rightward. • Income: When income increases, consumers buy more of most goods and the demand curve shifts rightward. • Expected future income and credit: When income is expected to increase in the future or when credit is easy to obtain, the demand might increase now. • Population: The larger the population, the greater is the demand for all goods. • Preferences: People with the same income have different demands if they have different preferences. Prices of Related Goods • Asubstitute is a good that can be used in place of another good. • Acomplement is a good that is used in conjunction with another good. Supply Resources and technology determine what it is possible to produce. Supply reflects a decision about which technologically feasible items to produce. 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. (positive relationship) The law of supply states:
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