Economics 1021A Chapter 3 20130925
A market is any arrangement that enables buyers and sellers to get information and do business with each
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:
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.
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
A demand curve (or a willingnessandabilitytopay 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
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