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Chapter 3

Economics 1021A Chapter 3


Department
Economics
Course Code
ECON 1021A/B
Professor
Terry Biggs
Chapter
3

Page:
of 4
Economics 1021A Chapter 3 2013-09-25
A market is any arrangement that enables buyers and sellers to get information and do business with each
other.
A competitive market is a market that has many buyers and many sellers so no single buyer or seller
can influence the price.
The money price of a good is the amount of money needed to buy it.
The 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.
If you demand something, then you want it, can afford it, and have made a definite plan to buy it. Wants are
the unlimited desires or wishes people have for goods and services. Demand reflects a decision about
which 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.
The term demand refers to the entire relationship between the price of the good and quantity demanded
of the good.
The 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. The law
of demand results from:
Substitution effect
When the price of a good or service rises relative to other prices (that is, when its opportunity cost rises),
people seek substitutes for it, so the quantity demanded of the good or service decreases.
Income effect
When the price of a good or service rises relative to income (that is, when the purchasing power of income
falls), people cannot afford all the things they previously bought, so the quantity demanded of the good or
service decreases.
A demand curve (or a willingness-and-ability-to-pay 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.
A rise in the price, other things remaining the same, brings a decrease in the quantity demanded and a
movement up along the demand curve.
A fall in the price, other things remaining the same, brings an increase in the quantity demanded and a
movement down along the demand 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.
When some influence on buying plans other than the price of the good changes, there is a change in
demand (and therefore a new demand curve) for that good.
When demand increases, the demand curve shifts rightward.
When demand decreases, the demand curve shifts leftward.
Six main factors that change demand are:
The prices of related goods
A substitute is a good that can be used in place of another good.
A complement is a good that is used in conjunction with another good.
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.
Expected future prices
If the expected future price of a good rises, current demand for the good increases and the demand curve
shifts rightward.
Income
A normal good is one for which demand increases as income increases.
An inferior good is a good for which demand decreases as income increases.
When income increases, consumers buy more normal goods and the demand curve shifts rightward.
Expected future income and credit
When expected future income increases or when credit is easy to obtain, the demand might increase now.
Population
The larger the population, the greater is the demand for all goods.
Preferences
People with the same income have different demands if they have different preferences.
If a firm supplies a good or service, then the firm, has the resources and the technology to produce it, can
profit from producing it, and has made a definite plan to produce and sell it. Resources and technology
determine what it is possible to produce. Supply reflects a decision about which technologically feasible
items to produce.
The quantity supplied of a good or service is the amount that producers plan to sell during a given
time period at a particular price.
The term supply refers to the entire relationship between the quantity supplied and the price of a good.
The law of supply states: Other things remaining the same, the higher the price of a good, the greater
is the quantity supplied; and the lower the price of a good, the smaller is the quantity supplied. The law of
supply results from the general tendency for the marginal cost of producing a good or service to increase as
the quantity produced increases. Producers are willing to supply a good only if they can at least cover their
marginal cost of production.
The supply curve (or a minimum-supply-price curve) shows the relationship between the
quantity supplied of a good and its price when all other influences on producers’ planned sales remain the
same.
A rise in the price of an energy bar, other things remaining the same, brings an increase in the quantity
supplied.
As the quantity produced increases, marginal cost increases. The lowest price at which someone is willing
to sell an additional unit rises. This lowest price is marginal cost.
When some influence on selling plans other than the price of the good changes, there is a change in
supply of that good. The quantity of the good that producers plan to sell changes at each and every price,
so there is a new supply curve.
When supply increases, the supply curve shifts rightward.
When supply decreases, the supply curve shifts leftward.
The five main factors that change supply of a good are:
The prices of factors of production
So a rise in the price of a factor of production decreases supply and shifts the supply curve leftward.
The prices of related goods produced
The supply of a good increases if the price of a substitute in production falls.
The supply of a good increases if the price of a complement in production rises.
Expected future prices
If the expected future price of a good rises, the supply of the good today decreases and the supply curve
shifts leftward.
The number of suppliers
An increase in the number of suppliers shifts the supply curve rightward.
Technology
Advances in technology increase supply and shift the supply curve rightward.
State of nature
A natural disaster decreases supply and shifts the supply curve leftward.