ECO304K Ch 3-4 Notes - ECO304K Chapter 3-4 I II Markets...

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ECO304K Chapter 3-4 I. Markets & prices a. Market (for a good) – set of all places where exchange takes place b/w buyers & sellers of that good i. Non-competitive market – discussed later (i.e. monopoly) ii. Competitive market – market where nobody is able to influence prices 1. Prices determined by competition 2. “No power influence” & “competition” usually require many buyers & sellers b. Prices we are talking about are relative prices (w/ respect to the price of an alternative good, prices = opportunity costs, the rate of exchange b/w 2 goods) II. Demand – what buyers want to buy, plan to buy, & can afford a. Law of Demand – negative relationship b/w quantities demanded & price, cet. par. i. Higher ongoing price, less buyers are going to purchase ii. Why #1: Substitution effect – a relative price hike is an incentive to choose alternatives (i.e. coke vs. pepsi) iii. Why #2: Income effect– people tend to preserve their income – when the price of a commodity rises, you tend to buy less of it iv. Why #3: Scarcity & decreasing marginal benefit – scarce (but useful) goods are usually pricey because the marginal benefit is high… As more & more of a scarce good becomes available, the marginal benefit will drop & the price will fall (i.e. iPhone) b. Each price corresponds to quantity demanded i. Demand schedule – set of ALL prices & quantities demanded ii. Demand curve – graph of demand schedule (buying plans as a function of selling price, cet. par.) c. Change in Quantity demanded vs. Change in Demand i.
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