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econpart2 Notes.docx

11 Pages
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Department
Economics
Course Code
ECON 1000
Professor
all

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Description
Chapter 3The market is any arrangement that enables buyers and sellers to get information and to do business with each other The competitive market is a market that has many buyers and many sellers so no single buyer or seller can influence the priceThe relative price of a good is the ratio of its money price to the money price of the next best alternative good Relative price is an opportunity costDemandIf you demand something then you Want itCan afford it andPlan to buy itWants are the unlimited desires or wishes that people have for goods and servicesDemand reflects a decision about which wants to satisfyThe quantity demanded of a good or service is the amount that consumer plans to buy during a given time period at a particular price The quantity demanded is not necessarily the same as the quantity actually bought The quantity demanded is measured as an amount per unit of timeThe 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 So a demand curve that illustrates the law of demand is downward sloping as price falls the quantity demanded increases and as the price rises the quantity demanded decreases Why does a higher price reduce the quantity demanded For two reasonsSubstitution effect When the price of a good rises its relative priceits opportunity cost rises As the opportunity cost of a good rises the incentive to economize on its use and switch to a substitute other goods that can be used in its place becomes strongerIncome effect When the price of a good rises the price rises relative to income Faced with a higher price and an unchanged income people cannot afford to buy all the things they previously bought They must decrease the quantities demanded of at least some goods and services Demand The entire relationship between the price of the good and the quantity demanded of it when all other influences on buyers plans remain the same It is illustrated by a demand curve and described by a demand schedule Demand curve shows the relationship between the price of the good and the quantity demanded of it when all other influences on consumers planned purchases remain the sameA demand schedule list the quantities demanded at each price when all other influences on consumers planned purchases remain the same We graph the demand schedule as a demand curve with the quantity demanded on the xaxis and the price on the yaxis Another way of looking at demand curve is a willingness and ability to pay curve The willingness and ability to pay is a measure of marginal benefit So a demand curve tells us the maximum that someone is willing to pay for an additional unit of a good or service If a small quantity is available the highest price that someone is willing and able to pay for one more unit is high But as the quantity available increases the marginal benefit of each additional unit falls and the highest price that someone is willing and able to pay also falls along the demand curve When any factors that influences buying plans changes other than the price of the good there is a change in demand When demand increases the demand curve shift rightward and the quantity demanded at each price if greater 6 main factors bring changes in demand They are changes in The prices of related goodsExpected future pricesIncome Although an increase in income leads to an increase in the demand for most goods it does not lead to an increase in demand for all goods A normal good is one for which demand increases as income increases An inferior good is one for which demand decreases as income increase 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 and services and viceversa
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