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Economics 1021A/B Study Guide - Energy Bar, Marginal Utility, Marginal Cost


Department
Economics
Course Code
ECON 1021A/B
Professor
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

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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
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