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chapter_31 notes.docx

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ECON 1000

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Chapter 3 – Demand and Supply Market – place where you find goods and services, enables buyers and sellers to get information and to do business with each other  Two parts : buyers and sellers  For: o Goods (apples and hiking boots) o Services (Haircuts and tennis lessons) o Resources (computer programmers and earthmovers) o Manufactured inputs (memory chips and auto parts) o Money (Japanese yen) o Financial securities (Yahoo! Stock)  Can be physical – where buyers and sellers meet and where an auctioneer or a broker helps to determine the prices  Groups of people that are spread around the world, never meet, and know little about each other, communicate through Internet or by telephone and fax Competitive market – 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 covers their opportunity cost  Consumers respond to changing opportunity cost by seeking cheaper alternatives to expensive items Money price – the number of dollars that must be given up in exchange for it Opportunity cost – the highest value alternative forgone, the quantity forgone Relative price – the ratio of one price to another  Price of the object / price of the object forgone  Relative price is opportunity cost  Expressed in terms of “basket” o Money price of good by the money price of the a “basket” of all goods (called a price index) Demand – want it, can afford it, and plan to buy it  Wants – unlimited desires or wishes that people have for goods and services  Scarcity guarantees that many – perhaps most of our wants will never be satisfied Quantity demanded – the amount that consumers plan to buy during a given time period at a particular price  Not the same as the quantity actually bought o Sometimes it exceeds the amount of goods available, so quantity bought is less o Measured by the amount per unit of time 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” High price reduces quantity demanded:  Substitution effect – if a price of good rises, relative price (opportunity cost) rises which forces a switch to a substitute substance o Substitutes – other goods that can be used in its place  Income effect – when price rises, faced with higher price and an unchanged income, people cannot afford to buy all the things they previously bought, must decrease the quantities demanded of at least some goods and services Demand – to the entire relationship between the price of a good and the quantity demanded of that good  Illustrated by the demand curve and the demand schedule Quantity demanded – a point on a demand curve – the quantity demanded at a particular price Demand curve shows the relationship between the quantity demanded for a good and its price when the quantity demanded of a good and its price when all other influences on consumers’ planned purchases remain the same  Demand schedule lists the quantities demanded at each price when all other influences on consumers’ planned purchases remain the same  Another way to look at demand curve is as a willingness-and-ability-to-pay curve (marginal benefit)  More supply , low willingness to pay for another unit; less supply, higher willingness Change in demand – any factor that influences buy pans other than the price of the good  Demand increases, shift rightwards, quantity demanded at each price is greater  6 factors that make changes in demand o The prices of related goods o Expected future prices o Income o Expected future income and credit o Population o Preferences Prices of Related Goods A substitute – a good that can be used in place of another good  If substitute price rises, people buy more of the good or service (demand increases)  If substitute price falls, people buy less of the good or service (demand decreases) A complement – a good that is used in a combination with another good  If complement price falls, people buy more of the good and service (demand increases)  If complement price rises, people buy less of the good and service (demand decreases) Expected Future Prices  If price is going to rise in the future, good can be stored, buy more of the good now (demand increases) o Buy less in the future, higher opportunity cost in the future  If the price is going to fall in the future, buy less today (demand decreases) o Buy more in the future, lower opportunity cost in the future Income –consumers’ income  Income increases, consumers buy more of most good (demand increases)  Income decreases, consumers buy less (demand decreases)  Although income increases demand for some goods not all o Normal good – demand increases as income increases o Inferior good – demand decreases as income increases Expected future income and credit  Income expected to increase or credit is easy to obtain, demand increases (now) o Ex. person getting bonus will spend before obtaining that bonus Population  Larger population, higher demand for all goods and services  Smaller population, lower demand for all goods and services  Greater proportion of the population in a given age, the greater demand for the goods and services used by that age group Preferences determine – the value that people place on each good and service Movement along the demand curve shows change in the quantity demanded  If the price of the good changes but no other influence on buying plan changes  If price falls, demand increases, move down along the demand curve  If price rises, demand decreases, move up along the demand curve Shift in demand curve shows change in demand  If the price of a good remains constant but some other influence on buyers’ plan changes  Demand increases, shift rightward
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