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Chapter 3

Economics 1021 Chapter 3 Notes

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Department
Economics
Course
Economics 1021A/B
Professor
Jeannie Gillmore
Semester
Fall

Description
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 Demand  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: 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  Income  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  Population  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  Preferences  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  Δ Quantity Demanded VS. Δ Demand o Change in Quantity Demanded  Occurs when the price of good changes but no other influence on buying plans change  Shown with movement along the demand curve o Change in Demand  Occurs when the price of good remains constant, but other influence on buyers‟ plans change  Shown with movement of the demand curve Supply  If a firm supplies a good or service: o Has the resources and technology to produce it o Can profit from producing it o Plan to produce and sel
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