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Chapter 3

Economics 1021A/B Chapter Notes - Chapter 3: The Surplus, Economic Equilibrium, Demand Curve


Department
Economics
Course Code
ECON 1021A/B
Professor
Bruce Hammond
Chapter
3

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Chapter 3
Demand and Supply
Markets and Prices
A competitive market is a market that has many buyers and many sellers, so that no single
buyer or seller can influence the price.
The ratio of one price to another is called a relative price, and a relative price is an opportunity
cost.
Demand
The quantity demanded is the amount of a good or service that consumers plan to buy in a
given time period at a particular price.
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 greater is the
quantity demanded.
Demand refers to the entire relationship between the price of the good and the quantity
demanded of the good.
Demand is illustrated by a:
o Demand schedule
o Demand curve
A demand 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.
When any factor that influences buying plans other than the price of the good changes, there is
a change in demand.
There are six key factors that change demand:
1. The prices of related goods
o A substitute is a good that can be used in place of another good. If the price of a
substitute rises, people buy less of the substitute and more of the other good.
o A complement is a good that is used in conjunction with another good. If the price of a
donut, a complement of coffee, rises, people buy less coffee.
2. Expected future prices
3. Income
o A normal good is one for which demand increases as income increases.
o An inferior good is one for which demand decreases as income increases.

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4. Expected future income and credit
5. Population
6. Preferences
When demand increases, the demand curve shifts rightward and when demand decreases, the
demand curve shifts leftward.
The figure below shows the distinction between a change in the quantity demanded and a
change in demand.
When the price of a good changes, there is a change in the quantity demanded, which is shown
by a movement along the demand curve.
When any other influence on buying plans changes, there is a change in demand, which is
shown by a shift of the demand curve.
Supply
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 law of supply states: Other thing 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.
Supply refers to the entire relationship between the quantity supplied and the price of a good.
Supply is illustrated by a:
o Supply schedule
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