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Chapter 3

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ECON 1050
Eveline Adomait

Economics Chapter 3: Supply and Demand Market any arrangement that enables buyers and sellers to get information and to do business with each other -Has two sides: buyers and sellers -There are markets for goods, services, resources (computer programmers), and other manufactured inputs (computer chips) -Can be a physical place, groups of people spread around the world through e-commerce, or like most markets, unorganized collections of buyers and sellers -Some markets are simple, others are more complex -Markets determine prices through buyers and sellers -Flower market in Holland -Competitive market is a market that has many buyers and many sellers so no single buyer or seller can influence the price -Producers offer items at a high enough price to cover their opportunity costs, consumers respond to this by seeking lower priced alternatives -Money price of a good is the amount of money needed to buy it. -Relative price of a good—the ratio of its money price to the money price of the next best alternative good—is its opportunity cost. -To express relative price we use a ‘basket’ of all goods and services -To calculate divide money price of a good by price index, which results in the opportunity cost of goods in terms of how much of the basket we must give up to buy it -Demand and supply model determine relative price Demand -3 criteria 1) we want it 2) We can afford it 3) We plan to buy it -Wants are the unlimited desires or wishes people have for goods and services. -Demand reflects a decision about what wants to satisfy -The quantity demanded of a good or service is the amount that consumers plan to buy during a particular time period, and at a particular price. -Quantity demanded is not the same as quantity bought -time is important because you may demand a large unit over a long period of time -buyers; aka demanders 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 larger is the quantity demanded. -not by any particular percentage; just a directional prediction The law of demand results from:  Substitution effect: When the relative price (opportunity cost) of a good or service rises, people seek substitutes for it, so the quantity demanded of the good or service decreases. -Figuring out ways of replacing or economizing to replace the good you can no longer afford  Income effect: When the price of a good or service rises relative to income, people cannot afford all the things they previously bought, so the quantity demanded of the good or service decreases. -Can afford less of things than you could before -Faced with higher price and unchanged income people must decrease their demand for some goods and services -Quantity demanded decreases when price rises Demand Curve and Demand Schedule -Demand refers to the entire relationship between the price of the good and quantity demanded of the good. -not a quantity -Quantity Demanded is a point on the 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. -Uses a graph Willingness and Ability to Pay -A demand curve is also a willingness-and-ability-to-pay curve. The smaller the quantity available, the higher is the price that someone is willing to pay for another unit. -Willingness to pay measures marginal benefit. -doesn’t have a one way relationship: x doesn’t cause Y A Change in Demand -When some influence on buying plans other than the price of the good changes, there is a change in demand for that good. -entire relationship changes -The quantity of the good that people plan to buy changes at each and every price, so there is a new demand curve. -When demand increases, the demand curve shifts rightward. -When demand decreases, the demand curve shifts leftward. Six main factors that change demand are 1. The prices of related goods -substitute is a good that can be used in place of another good. -ex. Coke and coffee -If price of coke goes up, demand for coffee may increase -Complement is a good that is used in conjunction with another good. -Gasoline and cars: when the price of a complement change the demand for the item may change -When the price of substitute for an energy bar rises or when the price of a complement of an energy bar falls, the demand for energy bars increases. 2. Expected future prices -If the price of a good is expected to rise in the future, current demand for the good increases and the demand curve shifts rightward as long as the good can be stored -Substituting with time; consumers retime their purchases 3. Income -When income increases; consumers buy more of most goods and the demand curve shifts rightward. -A normal good is one for which demand increases as income increases. Housing, transportation, food, travel -An inferior good is a good for which demand decreases as income increases. Purchased by low income people, when income rises they will stop buying these goods and move onto normal goods 4. 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. 5. Population -The larger the population, the greater is the demand for all goods. 6. Preferences -People with the same income have different demands if they have different preferences. -People place different values on different goods and services -ex. On-going preference moving away from cigarettes due to growing health concerns A Change in the Quantity Demanded Versus a Change in Demand Movement Along the Demand Curve -Wh
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