Chapter 3 – Where Prices Come From

Chapter 3 – Where Prices Come From -...

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Chapter 3 – Where Prices Come From: The Interaction of Demand and Supply 3.1 Perfectly Competitive Market: a market that meets the conditions of (1) many buyers and sellers, (2) all firms selling identical products, and (3) no barriers to new firms entering the market o Very restrictive assumptions, very few markets meet the qualifications. Ex: wheat and some agricultural products Demand – what a person wants to buy AND what a person is willing and able to buy Demand Schedules: a table showing the relationship between the price of a product and the quantity of the product demanded Quantity Demanded: the amount of a good or service that a consumer is willing and able to purchase at a given price Demand Curve: a curve that shows the relationship between the price of a product and the quantity of the product demanded o Downward demand curve – consumers will buy more of the product as the price falls Market Demand: the demand by all the consumers of a given good or service Law of Demand: the rule that holding everything else constant, when the price of a product falls, the quantity demanded of the product will increase, and when the price of a product rises, the quantity demanded of the product will decrease The inverse relationship between the price of a product and the quantity of the product demanded o Substitution Effect: the change in the quantity demanded of a good that results from a change in price, making the good more or less expensive relative to other good that are substitutes o Income Effect: the change in the quantity demanded of a good that results from the effect of a change in the good’s price on consumers’ purchasing power Purchasing power: the quantity of goods a consumer can buy with
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Chapter 3 – Where Prices Come From -...

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