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Lecture_3 - LECTURE 3 DEMAND SUPPLY 1 MARKETS AND PRICES...

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L ECTURE 3 DEMAND & SUPPLY
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1. M ARKETS AND P RICES Market is an arrangement that enables buyers and sellers to get information and to do business together. In our market-based economy, the interaction of demand and supply in markets determines: the prices of goods and services the quantity produced and consumed
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1. M ARKETS AND P RICES Markets vary in the intensity of competition Competitive market is a market that has many buyers and sellers, no single buyer or seller can influence the price. Buyers determine demand. Sellers determine supply.
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1. M ARKETS AND P RICES Money price of a good and service is the number of dollars that be given up for it. Relative price is the ratio of one good’s (money) price to another. An opportunity cost Determined by the theory of demand and supply Price index = (money price of a good)÷(money price of a “basket” of all other goods)
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2. D EMAND If you demand something, then you Want it Can afford it Plan to buy it Quantity of demand is the amount of a good that buyers are willing and able to purchase Not necessarily the same as the quantity actually bought Measured as an amount per unit of time Law of demand The law of demand states that, other things equal (ceteris paribus), the quantity demanded of a good falls when the price of the good rises, and vice versa.
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2. D EMAND Demand schedule illustrates the relationship between price of the good and the quantity demanded
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2. D EMAND Demand curve is a graph shows the relationship between the price of a good and the quantity demanded 0 0.5 1 1.5 2 2.5 3 3.5 0 2 4 6 8 10 12 14 Price of Ice-cream cone Quantity of Ice-cream Cones Demanded
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2. D EMAND Demand curve: a willingness-to-pay curve For each quantity, the price a long the demand curve is the highest price a consumer is willing to pay for that unit of output
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2. D EMAND Why does a higher price reduce the quantity demanded? Substitution effect The relative price of a good changes opportunity cost of the good changes people buy less of that good and more of its substitutes Income effect A change in price of a good change the amount that a person can afford to buy
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2. D EMAND A change in price a movement a long the demand curve change in the quantity demanded A change in other factors shifts the demand curve
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2. D EMAND A change in price a movement a long the demand curve change in the quantity demanded A change in other factors shifts the demand curve Prices of related goods Expected future prices Income Expected future income and credit Population preferences
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2. D
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