Microeconomics Ch.3 Review.docx

Microeconomics Ch.3 Review.docx - Microeconomics Chapter 3...

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Microeconomics Chapter 3 Review Market- Any arrangement that enables buyers and sellers to get information and do business with each other Competitive market- Many buyers and sellers so no single buyer or seller can influence price Money Price- Money needed to buy a good Relative Price: Ratio of the money price of one good to the money price of the next best alternative good. This is also known as the opportunity cost. In economics, we always talk about the relative price, not the money price. So, economists care that you can have an apple in place of two bananas (banana=$1, apple=$.50) Demand means you 1. Want it 2. Can afford it 3. Have made a definite plan to buy it Quantity Demanded- The amount consumers plan to buy during a given time period at a given price (qt. of coffee- 1 cup per day, 7 cups per week, 365 cups per week) Law of Demand- Other things remaining constant, as the price increases, a smaller quantity is demanded and as the price decreases a larger quantity is demanded. Why does a change in price change the quantity demanded? Substitution Effect: When the relative price (opportunity cost) of a good or service increases, people look for a substitute so the quantity demanded decreases. Income Effect: Price increases relative to income so people cannot afford all the things they previously bought so quantity demanded decreases. Demand Demand- Entire relationship between the price of a good and the quantity demanded. Demand Curve- Shows the relationship above when all other influences on the consumer’s planned purchases remains the same. Quantity Demanded: X-axis Price: Y-axis Increased price= Decrease of quantity demanded (movement up along the curve) Decreased Price= Increase of quantity demanded (movement down along the curve) Price Changes: Movement along the demand curve
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