6 Pages

Course Code
Economics 1021A/B
Jeannie Gillmore

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Chapter 3 Market and Prices Competitive Market – a market that has many buyers and sellers – no single buyer/seller can influence price Relative Price – ratio of one price to another  an opportunity cost Demand – want it, can afford, plan to buy Quantity demanded – amount that consumers plan to buy during given time at given price  quantity demanded may not be quantity bought Law of Demand – other things remaining the same, the higher the price good  smaller quantity demanded  lower price of good  greater quantity demanded Reasons higher price reduce quantity demanded 1. Substitution Effect  When price of good rises relative price (opportunity cost) rises  Although each good is unique it has substitutes  Opportunity cost rises  incentive to switch to substitute becomes stronger 2. Income Effect  Price rises (other things remain same), price rises relative to income  Higher price  unchanged income  cannot afford  Must decrease quantities demanded – normally goods with increased price Eg. Energy bar $3.00 drop to $1.50  become substitution for energy drinks Lower price of energy bar – people buy more  income effect  quantity of energy bars demanded increases Demand Curve Demand  entire relationship b/w price of good and quantity demanded Quantity Demanded  point on demand curve  quantity demanded at particular price Demand Curve  shows relationship between quantity demanded and price when all other influences on consumers remain the same Quantity demanded – x-axis price  y-axis Demand Schedule  lists quantities demanded at each price when all influences on consumers remain the same Eg. Bar  $0.5 quantity demanded is 22mil/week or $2.50  5mil demanded/week Willingness and Ability to Pay  Willingness and ability to pay is a measure of marginal benefit  Small quantity available  highest price willing/able to pay for one more unit is high  Quantity available increases  marginal benefit of each additional unit falls and highest price willing/able to pay falls on demand curve A Change in Demand  when any factor that influences buying plans changes, other than price of good then there is change in demand  Demand increase  demand curve shifts rightwards and quantity demanded at each price is greater 6 Factors  Changes in Demand 1. Prices of Related Goods  Substitute  used in place of another good  Quantity consumers plan to buy depends on price of substitutes  Complement  good that is used in conjunction with another good  Eg. Hamburger and fries – energy bars and exercise  If price of hour at gym falls, people buy more gym time AND more energy bars 2. Expected Future Prices  Expected future price rises  opportunity cost of obtaining good for future is lower today than in future when price increases  Buy more now before price increase  current demand increase  future demand for good decreases 3. Income  Consumer income influence demand  Income increase  buy more  increase in demand for most goods  Not demand for all goods increases  Normal good  when income increases  demand increases  Inferior god  demand decreases as income increases  Eg. As income increases  demand for air travel (normal good) increases and demand for bus trips (inferior good) decreases 4. Expected Future Income and Credit  Expected future income increases/credit easier to get  demand for good might increase now  Eg. Salesperson gets news she will get big bonus  goes in debt buys new car now rather than wait 5. Population  Demand depends on size/age structure of population  Larger pop  greater demand 6. Preferences  Demand depends on preferences  Preferences determine value people place on each good and service  Preference depends on weather, info, fashion  Eg, greater health/fitness awareness shifted preferences in favour of energy bars Change in Quan Demanded Vs Change in Demand  Change in quan demanded  movement along demand curve  price changes but no other influences change  change in demand  shift in demand curve   price remains constant but other influence changes  Demand increase  shift rightwards  If price of substitute rises, price of complement falls, expected future price rises, income increase (normal good), expected income increases, population increases  Demand decrease  shift leftwards  If substitute price falls, price of complement rises, expected future price falls, income decreases (normal good), expected future income decreases, population decreases Supply  Firm supplies good/service  Has resources and technology to produce it  Can profit from it  Plans to produce and sell Quantity Supplied – amount producers plan to sell during given time at certain price  May not be same amount as quantity sold Law of Supply  Other things remains same, the higher price  greater quantity supplied  Lower price  smaller quantity supplied  Higher price increases quantity supplied – marginal cost increases  Not worth producing good if price received for god does not cover marginal cost of producing it  Price of good rises, other things remain same, producers willing to incur higher marginal cost,  increase production  Higher price  increase quantity Supply Curve/Schedule  Supply – entire relationship b/w price of good and quantity supplied  Quantity supplied – pint on curve – quantity supplied at certain price  Supply curve – relationship b.w quantity supplied a
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