Chapter 3

Chapter 3 - Chapter 3: Where Prices Come From: The...

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Chapter 3: Where Prices Come From: The Interaction of Supply and Demand Perfect 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 The Demand Side of the Market The main factor in consumer decisions, will be the price It is not only about what a consumer wants to buy but what the consumer is both willing and able to buy Demand Schedules and Demand Curves 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 Market demand- the demand by all the consumers of a given good or service Buyers demand a larger quantity of a product as the price falls because the product becomes less expensive relative to other products and because they can afford to buy more at a lower price The Law of Demand 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 What Explains the Law of Demand? When the price of a product falls, consumers buy a larger quantity because of the substitution effect and income effect Substitution Effect 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 goods that are substitutes The Income Effect 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 is the quantity of goods a consumer can buy with a fixed amount of income Holding Everything Else Constant: The Ceteris Paribus Condition
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Ceteris paribus- the requirement that when analyzing the relationship between two variables—such as price and quantity demanded—other variables must be held constant (all else equal) Variables That Shift Market Demand Income Prices of related goods Tastes Population and demographics Expected future prices Income The income that consumers have available to spend affects their willingness and ability to buy a good Normal good- a good for which the demand increases as income rises and decreases as income falls Inferior good- a good for which the demand increases as income falls and decreases as
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Chapter 3 - Chapter 3: Where Prices Come From: The...

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