Economics 1021A/B Chapter Notes - Chapter 3: Economic Equilibrium, Demand Curve, Complementary Good

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Chapter 3 Concepts/Definitions ECON 1021 09/19/15
Market: Any arrangement that enables buyers and sellers to get information and to do business with
each other
- Has 2 sides: Buyers and Sellers
- There are markets for goods, for services, for factors of production, other manufactured inputs,
and for money/stock
- Some markets are physical places where buyers and sellers meet, other markets are e-
commerce and virtual, but most are unorganized collections of buyers and sellers
- Markets vary in intensity of competition that buyers and sellers face
-Competitive Market: A market that has many buyers and sellers, so no single buyer/seller can
influence the price
- Producers offer items for sale only if the price is high enough to cover their opportunity cost,
and consumers respond to changing opportunity cost by seeking cheaper alternatives
-Money Price: The number of dollars that must be given up in exchange for an item
-Relative Price: The ratio of one price to another
If you demand something, then you:
1. Want it
2. Can afford it
3. Plan to buy it
Wants: Unlimited desires or wishes that people have for goods and services
- Scarcity guarantees that many of our wants will never be satisfied
- Demand reflects a decision about which wants to satisfy
Quantity Demanded: The amount that consumers plan to buy during a given time period at a particular
price
- Not necessarily the same as the quantity actually bought
- Sometimes the QD > Quantity of goods available, so Quantity Bought < QD
- Measured as an amount per unit of time
- Many factors influence buying plans, and one of them is the price
Law of Demand: 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 2 things : Substitution effect and Income Effect
-Substitution Effect: When the price of a good rises, its relative price rises
Although each good is unique, it has substitutes – other goods that can be used in its
place
As the opportunity cost of a good rises, the incentive to economize on its use and switch
to a substitute becomes stronger
-Income Effect: When a price rises, the price rises relative to income
Faced with a higher price and an unchanged income, people cannot afford to buy all the
things they previously bought
They must decrease the quantities demanded of at least some goods and services
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Chapter 3 Concepts/Definitions ECON 1021 09/19/15
Normally, the good whose price has increased will be one of the goods that people buy
less of
Demand: Relationship between the price of a good and the quantity demanded of that good
- Illustrated by the demand curve and demand schedule
-Quantity Demanded: Refers to point on a demand curve – the quantity demanded at a
particular price
-Demand Curve: Shows relationship between the quantity demanded of a good and its price
when all other influences on consumers’ planned purchases remain the same
-Demand Schedule: Lists the quantities demanded at each price when all other influences on
consumers’ planned purchases remain the same
Willingness and Ability to Pay: Another way to look at the demand curve
- Willingness and Ability to pay is a measure of marginal benefit
- If small quantity is available, the highest price that someone is willing and able to pay for one
more unit is high
- As quantity available increases, the marginal benefit of each additional unit falls and the highest
price that someone is willing and able to pay also falls, along with the demand curve
Change in Demand: Any factor that influences buying plans changes, other than the price of the good
- When Demand ^, the curve shifts right ward and the quantity demanded at each price ^
- When Demand v, the curve shifts left ward and the quantity demanded at each price v
- 6 main factors bring changes in demand
-Price of Related Goods:
Substitute: A good that can be used in place of another good
If the price of a substitute good rises, the demand of the initial good increases
Complement: A good that can be used in conjunction with another good
If the price of a complement good falls, the demand of the initial good increases
-Expected Future Prices:
If the expected future price of a good rises and the good can be stored, the opportunity
cost of obtaining the good for future use is lower today than it will be in the future when
people expect the price to be higher; People buy more of the good now before its price
is expected to rise
TODAY the demand for the good increases
If the expected future price of a good falls, the opportunity cost of buying the good
today is high relative to what it is expected to be in the future; People buy less of the
good now before its price is expected to fall
TODAY the demand for the good falls
-Income: Consumers income influences demand
When income increases, consumers buy more of most goods; when income decreases,
consumers buy less of most goods
Increase in income leads to increase in the demand for most goods, it does not lead to
an increase in the demand for all goods
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