Microeconomics – Chapter 3
Competitive Market – a market that has many buyers and many sellers, so no single buyer or seller
can influence the price.
Producers offer items for sale only if price is high enough to cover their opportunity cost.
Money Price – the price of an object that must be given up in exchange for it
Relative Price – ratio of one price to another/is an opportunity cost
1. Want it
2. Can afford it
3. Plan to buy it
Quantity Demanded – amount that consumers plan to buy during a given time period at a
particular price/ measured as an amount per unit of time
Law of Demand
Other things remaining the same, the higher the price of a good, the smaller 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, the consumer has greater incentive to switch to
Income Effect – the good whose price has increased will be one of the goods people buy less of.
Consumers buy more of the cheaper item.
Demand – entire relationship between the price of a good and the quantity demanded of that god
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.
Change in Demand – when any factor that influences buying plans changes, other than the price of
Six factors that bring Changes in demand:
1. Prices of related goods – prices of good consumer plans to buy depends in part on prices of
substitutes of good
Substitute – good that can be used in place of another good
Complement – good that is used in conjunction with another good
2. Expected future prices – if expected future price of a good rises, opportunity cost of obtaining the good for future use is lower today than it will be in
3. Income – when income increases, consumers buy more of most goods and vice versa
Normal Good – one for which demand increases as income increases
Inferior Good – one fore which demand decreases as income increases
4. Expected future income and credit – when consumer is expected to earn more money, they
purchase more now, before they receive the money
5. Population – larger population = greater demand/smaller population = less demand
6. Preferences – determines the value that people place on each good and service
Change in the quantity demanded = movement along the demand curve
Occurs when: the price of a good changes but no other influence on buying plan changes
Change in Demand = shift of the demand curv