Ch03 - Chapter 3: Demand and Supply Objectives: Describe a...

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Chapter 3: Demand and Supply Objectives: Describe a competitive market and think about a price as an opportunity cost Explain the influences on demand Explain the influences on supply Explain how demand and supply determine prices and quantities bought and sold Use demand and supply to make predictions about changes in prices and quantities
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Markets and Prices A market is any arrangement that enables buyers and sellers to get information and do business with each other. A competitive market is a market that has many buyers and many 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 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 .
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Demand If you demand something, then you 1. Want it, 2. Can afford it, and 3. Have made a definite plan to buy it. 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.
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Demand The Law of Demand 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 larger is the quantity demanded. The law of demand results from Decreasing marginal utility Substitution effect Income effect
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Demand Decreasing Marginal Utility As more and more of a good is consumed, the marginal utility you get (its value to you) from each additional unit is less and less.
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Demand 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. 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.
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Demand Demand Curve and Demand Schedule The term demand refers to the entire relationship between the price of the good and quantity demanded of the good. 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.
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Demand Figure 3.1 shows a demand curve for energy bars. A rise in the price, other things remaining the same, brings a decrease in the quantity demanded and a movement along the demand curve.
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Willingness and Ability to Pay A demand curve is also a willingness-and-ability- to-pay curve. The smaller the quantity
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Ch03 - Chapter 3: Demand and Supply Objectives: Describe a...

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