Economics: Chapter Three
- Competitive market – a market that has many buyers and 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 opportunity cost of an action is the highest valued alternative forgone.
o If when you buy a coffee, the highest-valued thing you forgo is some gum,
then the opportunity cost of the coffee is the quantity of gum forgone.
o To calculate the opportunity cost, we divide the price of a cup of coffee by
the price of a pack of gum and find the ratio of one price to another. This is
called a relative price, and a relative price is an opportunity cost.
- 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 plan to buy it.
- The quantity demanded of a good service is the amount that consumers plan to buy
during a given time period at a particular place.
o Measured as an amount per unit of time.
- The law of demand states that “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.”
o The law of demand results from:
o Substitution effect – When the relative price (opportunity cost) of a good or
service rises, people seek substitutes for it, so the quantity demanded of the
good or service decreases. (example, an energy bar sells for $3 and then its
price falls to $1.50, people now start substituting energy drinks for energy
bars – the substitution effect)
o Income effect -- When the price of a good or service rises relative to income,
people cannot afford all the things they previously bought, so the quantity
demanded of the good or service decreases. (since people saved money
buying the energy bar for $1.50, they’ll buy more quantities of it – the
- Demand refers to the entire relationship between the price of a good and the
quantity demanded of that good.
o Is illustrated by the demand curve and the demand schedule.
- A demand curve shows the relationship between the quantity demanded of a good
and its price when all other influences on a consumers’ planned purchases remained
- A demand schedule lists the quantities demanded at each price when all the other
influences on consumers’ planned purchases remain the same.
- Another way of looking at the demand curve is as a willingness-and-ability-to-pay
o The willingness and ability to pay is a measure of marginal benefit
o The smaller the quantity available, the higher is the price that someone is
willing to pay for another unit.
- When any factor that influences buying plans changes, other than the price of the
good, there is a change in demand.
o The quantity of the good that people plan to buy changes at each and every
price, so there is a new demand curve. o When demand increases, the demand curve shifts rightward.
o When demand decreases, the demand curve shifts leftward.
- Six main factors bring changes in demand. They are changes in:
o The price of related goods
o Expected future goods
o Expected future income and credit
- A substitute is a good that can be used in place of another good. (a bus ride instead
of a car ride etc)
- A complement is a good that is used in conjunction with another good (example,