Ch03 - Chapter 3: Demand and Supply I. Markets and Prices...

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C h a p t e r 3 : D e m a n d a n d S u p p l y I. Markets and Prices A. A market is any arrangement that enables buyers and sellers to get information and do business with each other. B. A competitive market is a market that has many buyers and many sellers so no single buyer or seller can influence the price. C. The money price of a good is the amount of money needed to buy it. The relative price of a good is the ratio of its money price to the money price of another good or a market basket of goods. A relative price is an opportunity cost . II. Demand A. 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. B. The Law of Demand 1. 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. 2. The law of demand results from: a) the substitution effect —when the relative price (opportunity cost) of a good or service rises, people seek substitutes for it—and b) the income effect —when the price of a good or service rises relative to income, people cannot afford all the things they previously bought. C. Demand Curve and Demand Schedule 1. The term demand refers to the entire relationship between the price of the good and quantity demanded of the good. a) The demand curve shows the relationship between the quantity demanded of a good and its price, holding all other influences constant. Figure 3.1 shows a demand curve for energy bars. b) A demand curve is also a willingness-and-ability-to-pay curve, which means that a demand curve is a marginal benefit curve . D. A Change in Demand 1. When any factor that influences buying plans other than the price of the good changes, there is a change in demand for that good. The quantity of the good that people plan to buy changes at each and every price, so there is a new demand curve. a) When demand increases, the quantity that people plan to buy increases at each and every price. The demand curve shifts rightward. b) When demand decreases, the quantity that people plan to buy decreases at each and every price. The demand curve shifts leftward.
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2. The factors that change demand (summarized in Table 3.1 page 64) are: a) 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
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This note was uploaded on 04/03/2009 for the course ECON 2101 taught by Professor Bill during the Spring '09 term at Temple.

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Ch03 - Chapter 3: Demand and Supply I. Markets and Prices...

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