Chapter 3 Flashcards
Competitive market
A market that has many buyers and many sellers, so no single buyer or seller can influence the price.
Relative price
The ratio of one price to another.
Relative price is an opportunity cost.
Quantity demanded
The amount that consumers plan to buy during a given time period at a particular price.
Law of demant
The higher the price of a good, the smaller is the quantity demanded.
The lower the price of a good, the greater is the quantity demanded.
Why does a higher price reduce the quantity demanded?
- Substitution effect
- Income effect
Substitution effect
When the price of a good rises, its opportunity cost raises.
As the opportunity cost of a good rises, the incentive to economize on its use and switch to a substitute becomes stronger.
Income effect
When a price rises, the price rises relative to income.
People cannot afford to buy all the things they previously bought. They must decrease the quantities demanded of at least some goods and services.
Demand
The entire relationship between the price of a good and the quantity demanded of that good.
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.
Change in demand
When any factor - that influences buying plans - changes other than the price of the good
Substitute
A good that can be used in place of another good.
Complement
A good that is used in conjunction with another good.
Normal good
A good for which demand increases as income increases.
Inferior good
A good for which demand decreases as income increases.
Quantity supplied
The amount that producers plan to sell during a given time period at a particular price.
