Chapter_3[1] - Chapter 3: Demand and Supply Rocket: house...

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Chapter 3: Demand and Supply Rocket: house prices Roller Coaster: stocks Slide: tropical food prices 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 . Demand If you demand something, then you 1. Want it, 2 Can afford it and it 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. 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. The law of demand results from: Substitution effect Income effect Substitution effect —when the relative price (opportunity cost) of a good or service rises, people seek substitutes for it, so the quantity demanded 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 decreases. 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.
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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. Demand (With Graph) Decrease in demand: curve falls to the left down Increase in demand: curve increase up to the right A demand curve is also a willingness and ability to pay curve The smaller the quantity available, the higher is the price that someone is willing to pay for another unit. Willingness to pay measures marginal benefit . A Change in Demand The quantity of the good that people plan to buy changes at each and every price, so there is a new demand curve. When demand increases, the demand curve shifts rightward. When demand decreases, the demand curve shifts leftward. Six main factors that change demand are: 1. The prices of related goods (substitutes and complementary) 2. Expected future prices 3. Income 4. Expected future income 5. Population 6 Preferences Prices of Related Goods A substitute is a good that can be used in place of another good A complement is a good that is used in conjunction with another good. When the price of substitute for Blue Ray Players rises or when the price of a complement for Blue Ray
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This note was uploaded on 01/25/2012 for the course ECON 101 taught by Professor Vanderwaal during the Spring '08 term at Waterloo.

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Chapter_3[1] - Chapter 3: Demand and Supply Rocket: house...

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