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Chapter 2

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ECON 101
Eva Lau

Chapter 2 - Competitive market  has many buyers and seller, no single buyer or seller can influence price - Money price  money needed to buy - relative price of good is ratio of its money price to money price of next best good  opportunity cost - wants  unlimited desires; demand  decision on what wants to satisfy; if demand something  want it, can afford it, plan to buy it; quantity demanded  amount consumers plan to buy in particular time period at particular  measured amount per time - law of demand  other things the same, higher price, smaller quantity demanded, lower price, larger demand - law of demand due to substitution effect  when opport. cost rises, people seek substitutes, so quantity demanded decreases and income effect  when price rises, income same, cannot afford everything previously bought, quantity demanded decreases - demand refers to entire relationship between price and quantity demanded of good; demand curve  shows this relationship - willingness to pay measures marginal benefit Law of Demand - when influence on buying plans (with exception of price) changes, quantity planned on buying changes at Quantity demanded: Decreases if: Increases if: each price point  ENTIRE DEMAND changes, not - price of good rises - price of good falls quantity demanded  demand curve shifts - CHANGE IN DEMAND caused by 6 factors: price of Changes in Demand Demand of good: related goods, expected future prices, income, Decreases if: Increases if: expected future income/credit, population, preferences - price of substitute falls - price of substitute rises - price of complement rises - price of compliment falls - Substitute  good that can be used in place of other - future price is expected to fall - future price expected to rise good compliment  good used with another good - income falls - income rises - When income increases, consumers buy more of most - expected future income falls or - expected future income rises goods  normal good – demand increases as income credit is harder to get or credit is easier to get increases, opposite true for inferior goods - population decreases
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