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Chapter 3

Economics Chapter 3 Demand and Supply.docx

6 Pages
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Department
Economics
Course Code
ECON 1050
Professor
Eveline Adomait

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Chapter 3- Demand and Supply Markets and Prices Competitive market- a market that has many buyers and sellers so that no single buyer or seller can influence the price Money price- the price of an object in the number of dollars that must be given uo in exchange for it Opportunity cost- the highest valued alternative forgone. Calculate by dividing the price of one item by the price of another item and find the ratio of one price to another. The ratio is called the relative price and a relative price is an opportunity cost. We can express the relative price of an item in terms of another good. We calculate it by dividing the money price of a good by the money price of a “basket” of all goods (price index). The resulting relative price tells us the opportunity cost of the good in terms of how much of the “basket” we must give up to buy it. Demand - wants are the unlimited desires or wishes that people have for goods and services Quantity demanded: the amount that consumers plan to buy during a given time period at a particular price ‘ Law of Demand: other things remaining the same, the higher the price of a good, the small is the quantity demanded; and the lower the price of a good, the greater is the quantity demanded. Substitution effect: when the price of a good rises, its relative price rises. Each good has substitutes- other goods that can be used in its place. As the opportunity cost if a good rises, the incentive to economize on its use and switch to a substitute becomes larger. Income Effect: when a price rises, other things remaining the same, the price rises relative to income. Faces with a higher price an an unchanged income, people cannot affort to buy all the thigns they previously bought. They must decrease the quantities demanded of at least some goods and services. Normally, people will buy less of a good whose price has increased. Demand Curve and Demand Schedule Demand: refers to the entire relationship between the price of a good and the quantity demanded. - quantity demanded refers to a point on a demand curve- the quantity demanded at a particular price. - Demand 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 - Demand schedule lists quantities demanded at each price when all the other influences on consumers’ planned purchases remain the same - graph demand schedule as a demand curve with qd on x-axis and price on y Demand curve also = willingness and ability to pay curve - willingness and ability to pay is a measure of marginal benefit - if a small quantity is available, the highest price that someone is willing and able to pay for one more unit is high - 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 Change in demand is - brought when any factor that influences buying plans changes. - When demand increases, the demand curve shifts rightward and the quantity demanded at each price is greater - Six main factors bring changes in demand: - the price of related goods o substitute- a good that can be used in place of another good  if the price of a substitute for something falls, people will buy more of the substitute and less of the first good, and demand for the substitute will rise o complement- a good that is used in conjunction with another good  if the price of one good drops, people will buy more of a that good and more of the complement - expected future prices o if the expected future price of a good rises and the good can be stored, the opportunity cost of obtaining the good for future use is lower today than it will be in the future of when people expect the price to be higher o people retime their purchases- substitute over time o buy more of the good now before its price is expected to rise(+less after) so the demand for good today increases o if the expected future price of a good falls, opportunity cost of buying the good today is high relative to what it is expeted to be in future- people buy less of the good now before its price is expected to fall, so demand for good decreases today and increases in the future - income o income increase= buy more of most goods; income decrease= buy less of most goods o a normal good is one for which demand increases as income increases o inferior good- demand decreases as income increases - expected future income and credit o when expected future income increases or credit becomes easier to get, demand for the good might increase now - population o larger the population, the greater the demand for all goods and services o smaller the population, smaller the demand for all goods and services - preferences o demand depends on preference o determines the value that people place on each good/ service o depend on such things as weather, info, fashion - changes in the influences on buying plans bring either a change in QD or in D - therefore either a movement along demand curve or a shift of demand curve - a point on the demand curve shows the QD at a given price, so a movement along demand curve shows change in QD - the entire demand curve shows demand so a shift of the demand curve shows a change in demand Movement along demand curve - price of good changes , illustrated by a movement along demand curve - fall in price of a good increases the quantity demanded of it; movement down along the demand curve - price of good rises decreasing the QD- illustrated movement up along D curve Shift of the Demand Curve - price of a good remains constant but other influences on buying plans change, there is a change in demand for that good - illustrate change in demand as a shift of the demand curve - demand increas
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