Chapter 3 Outline

Chapter 3 Outline - Chapter 3 Outline 1 A market is any institution or mechanism that brings together buyers(demanders and sellers(suppliers of a

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Chapter 3 Outline 1. A market is any institution or mechanism that brings together buyers (“demanders”) and sellers (“suppliers”) of a particular good or service. This chapter assumes that markets are highly competitive. 2. Demand is a schedule of prices and the quantities that buyers would purchase at each of those prices during a selected period. a. The law of demand states that there is an inverse or negative relationship between price and quantity demanded. Other things equal, as price increases, buyers will purchase smaller quantities, and as price decreases, they will purchase larger quantities. There are three explanations for the law of demand: 1. Diminishing marginal utility. After a point, consumers get less satisfaction or benefit from consuming more and more units. 2. Income effect. A higher price for a good decreases the purchasing power of consumers’ incomes so that they can’t buy as much of the good. 3. Substitution effect. A higher price for a good encourages consumers to search for cheaper substitutes and thus buy less of it b. The demand curve has a downward slope and is a graphic representation of the law of demand. c. Market demand for a good is a summation of all the demands of all consumers of that good at each price. Although price has the most important influence on quantity demanded, other factors can influence demand. These factors, called determinants of demand, are consumer tastes (preferences), the number of buyers in the market, consumers' income, the prices of related goods, and consumer expectations. d. An increase or decrease in the entire demand schedule and the demand curve (a change in demand) results from a change in one or more of the determinants of demand. For a particular good, 1. an increase in consumer tastes or preferences increases its demand; 2. an increase in the number of buyers increases its demand; 3. consumers’ income increases its demand if it is a normal good (one where income and demand are positively related), but an increase in consumers’ income decreases its demand if it is an inferior good (one where income and demand are negatively related); 4. an increase in the price of a related good
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This note was uploaded on 10/06/2008 for the course ECO 2252 taught by Professor Edward during the Spring '08 term at Troy.

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Chapter 3 Outline - Chapter 3 Outline 1 A market is any institution or mechanism that brings together buyers(demanders and sellers(suppliers of a

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