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Chapter 3

Economics 1021A/B Chapter Notes - Chapter 3: Marginal Cost, Economic Equilibrium, Opportunity Cost

Course Code
ECON 1021A/B
Jeannie Gillmore

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Chapter 3: Demand and Supply
Markets and Prices
Market: Any arrangement that enables buyers and sellers to get information and to do business with each other
o Competitive Market: A market that has many buyers and sellers, so no single person can influence the price
o Markets consist of:
Buyers & sellers
Markets for goods & services & resources & inputs & currency & etc.
Physical markets & online (e-commerce) markets & unorganized collection of buyers and sellers
o Money Price:
The number of dollars that must be given in exchange for something
The quantity of the highest alternative forgone of an action (opportunity cost) can be calculated with
the money price of the item bought and the item forgone
o Relative Price (commonly expressed as price):
Price Index: Money price of a basket of all goods
Ratio of one price to the other
An opportunity cost that can be expressed in currency, or any other valuable good
If you demand something, you
o Want it (Unlimited desires or wishes that people have for goods and services)
o Can afford it (Enough money to satisfy the specific wants)
o Plan to buy it (Decide to satisfy the specific wants)
Quantity Demanded:
o Amount of a good or service that consumers plan to buy during a given period at a particular price
o Measured at an amount per unit of time
o Not necessarily the same as the quantity actually bought (sometimes the quantity demanded exceeds the
amount of goods available for sale and therefore the quantity bought is less than the quantity demanded)
o A factor affecting quantity demanded include the relationship between the quantity demanded and its price
The Law of Demand:
o 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; due to:
Substitution Effect: Every good has substitutes (other goods that can be used in its place), and as the
opportunity cost of a good rises, incentives to economize and switch to a substitute becomes stronger
Income Effect: When the price of a good rises, the price rises relative to income
o EX: If the price of an energy bar doubles,
People now buy fewer energy bars and more energy drinks (substitution effect)
Faced with a tighter budget, people buy even fewer energy bars (income effect)
Demand Curve & Demand Schedule:
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o Demand: The entire relationship between the price of a good and the quantity demand of that good
Illustrated via the demand curve and the demand schedule (both of which assume that all other
influences on the number of purchases stay constant)
Quantity demanded is simply a certain point on the demand curve & schedule
o Demand Schedule: A list of the quantities demanded at each price when all the other influences
o Demand Curve: A curve that shows the relationships between the quantity demanded of a good and its price
(Quantity demanded = x-axis) (Price = y-axis)
Willingness & Ability to Pay: A measure of marginal benefit. If a smaller quantity is available, the
higher price that somebody is willing to pay for one more unit of it.
Change in Demand: Occurs when any factor that influence buying power other than price of the good changes
o When demand increases, the demand curve shifts rightward (vice versa)
o Main factors of change in demand:
Price of related goods:
Substitute: A good that can be used in place of another good
Complement: Good that is used in conjunction with another good
When the price of substitute for an item rises or when the price of a complement of the item falls, the
demand for the item increases
Expected future prices
If the price of an item is expected to rise in the future, current demand for the good increases
This will cause current demand for the item to increase for the time being, and decrease in the future
Normal Good: A good for which demand increases as income increases
Inferior Good: A good for which demand decreases as income increases
When income increases, consumers buy more of most goods and the demand curve shifts rightward
Expected future income and credit
When income is expected to increase in the future, or when credit is easy to obtain, demand may increase
The larger the population, the greater is the demand for all goods and services
The larger the proportion of the population in a given age group, the greater is the demand
Value that people place on each good and service
People with the same income can have different demands if they have different preferences
o Change in demand for a certain good:
Decreases if:
Increases if:
The price of a substitute falls
The price of a substitute rises
The price of a complement rises
The price of a complement falls
The price of is expected to fall
The price is expected to fall
Income falls
Income rises
Expected future income
Expected future income rises
Credit becomes harder to obtain
Credit becomes easier to obtain
Population decreases
Population increases
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