Chapter 2 Flashcards
Competitive Markets
A market composed of many buyers and sellers acting independently none of whom has any ability to influence the price of a product
Demand
An indication of various quantities of goods/service a consumer is willing and able to buy at various prices during a particular time, ceteris paribus
Law of Demand
As the price of a product increases the quantity demanded of the product will decrease; As the price of a product decreases the quantity demand of the product will increase.
The income effect
Real income refers to income that is adjusted for price changes and implies the actual buying power of a consumer.
The substitution effect
As the price of a good decreases, consumers switch from other substitute goods to this good because its price of comparatively lower.
The law of diminishing marginal utility
This law states that as we consume additional units of something, the satisfaction (utility) we serve of each additional unit (marginal unit) grows smaller (diminishes)
Ceteris Paribus
All else equal, (other things are equal)
Income: Normal Goods
A good is a normal good when demand for it increases in response to an increase in comsuer income
Income: Inferior Goods
Where the demand falls as consumer income increases
Tastes and preferences
If preferences & tastes change in favour of a product
Other Related Goods’ Prices: Complementary Goods
2 goods are complementary if they tend to be used together
Other Related Goods’ Prices: Substitute Goods
2 goods are substitutes if they satisfy the need
Expectations of future prices or incomes
When consumers prices rise in the near future, they demand MORE today, and vice versa
When consumers expect their incomes to fall in the near future, they demand LESS today, and vice versa
Size of the market (Number of consumers)
If there is an increase in the number of consumers, demand increases & therefore the market demand curve shifts to the right.
Diagram: Price Change
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