Chapter 3 Flashcards
When you need a new pair of running shoes, want a bagel and a latte, plan to upgrade your cellphone, or need to fly home for Thanksgiving, you must find a place where people sell those items or offer those services. The place in which you find them is a _______.
When you need a new pair of running shoes, want a bagel and a latte, plan to upgrade your cellphone, or need to fly home for Thanksgiving, you must find a place where people sell those items or offer those services. The place in which you find them is a market.
You learned in Chapter 2 (p. 44) that a market is any arrangement that enables buyers and sellers to get information and to do business with each other.
A market has two sides: ______ and _______.
A market has two sides: buyers and sellers.
There are markets for _____ such as apples and hiking boots, for ______ such as haircuts and tennis lessons, for ________________ such as computer programmers and earthmovers, and for other manufactured _____ such as memory chips and auto parts.
There are markets for goods such as apples and hiking boots, for services such as haircuts and tennis lessons, for factors of production such as computer programmers and earthmovers, and for other manufactured inputs such as memory chips and auto parts.
Markets vary in the __________________ that buyers and sellers face
Markets vary in the intensity of competition that buyers and sellers face
Competitive market
a market that has many buyers and many sellers, so no single buyer or seller can influence the price
Producers offer items for sale only if the price is high enough to cover their _____________. And consumers respond to changing _____________ by seeking cheaper alternatives to expensive items.
Producers offer items for sale only if the price is high enough to cover their opportunity cost. And consumers respond to changing opportunity cost by seeking cheaper alternatives to expensive items.
Money price
the number of dollars that must be given up in exchange for a good or service
If, when you buy a cup of coffee, the highest-valued thing you forgo is some gum, then the opportunity cost of the coffee is the quantity of gum forgone. We can calculate the quantity of gum forgone from the money prices of the coffee and the gum.
Relative price
the ratio of the price of one good or service to the price of another good or service. A relative price is an opportunity cost
If the money price of coffee is $1 a cup and the money price of gum is 50¢ a pack, then the opportunity cost of one cup of coffee is two packs of gum. To calculate this opportunity cost, we divide the price of a cup of coffee by the price of a pack of gum and find the ratio of one price to the other.
Calculating relative price
The normal way of expressing a relative price is in terms of a “basket” of all goods and services.
To calculate this relative price, we divide the money price of a good by the money price of a “basket” of all goods (called a price index).
The resulting relative price tells us the opportunity cost of the good in terms of how much of the “basket” we must give up to buy it.
The demand and supply model that we are about to study determines _____________
The demand and supply model that we are about to study determines relative prices, and the word “price” means relative price.
When we predict that a price will fall, we do not mean that its money price will fall—although it might. We mean that its relative price will fall. That is, its price will fall relative to the average price of other goods and services.
If you demand something, then you: (three things)
Want it.
Can afford it.
Plan to buy it.
Wants are ____________________
Wants are the unlimited desires or wishes that people have for goods and services.
How many times have you thought that you would like something “if only you could afford it” or “if it weren’t so expensive”? Scarcity guarantees that many—perhaps most—of our wants will never be satisfied. Demand reflects a decision about which wants to satisfy.
Quantity demanded
the amount of a good or service that consumers plan to buy during a given time period at a particular price
The quantity demanded is not necessarily the same as the quantity actually bought. Sometimes the quantity demanded exceeds the amount of goods available, so the quantity bought is less than the quantity demanded.
The quantity demanded is measured as _____________.
The quantity demanded is measured as an amount per unit of time.
For example, suppose that you buy one cup of coffee a day. The quantity of coffee that you demand can be expressed as 1 cup per day, 7 cups per week, or 365 cups per year.
Law of Demand
“Other things remaining the same, the higher the price of a good, the smaller is the quantity demanded; and the lower the price of a good, the greater is the quantity demanded.”
Why does a higher price reduce the quantity demanded? For two reasons:
Substitution effect
Income effect
Substitution Effect
When the price of a good rises, other things remaining the same, its relative price—its opportunity cost—rises. Although each good is unique, it has substitutes—other goods that can be used in its place.
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, other things remaining the same, the price rises relative to income.
Faced with a higher price and an unchanged 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.
Normally, the good whose price has increased will be one of the goods that people buy less of.
Substitution and Income effect - examples
Suppose that an energy bar initially sells for $3 and then its price falls to $1.50. People now substitute energy bars for energy drinks—the substitution effect. And with a budget that now has some slack from the lower price of an energy bar, people buy even more energy bars—the income effect. The quantity of energy bars demanded increases for these two reasons.
Now suppose that an energy bar initially sells for $3 and then the price doubles to $6. People now buy fewer energy bars and more energy drinks—the substitution effect. And faced with a tighter budget, people buy even fewer energy bars—the income effect. The quantity of energy bars demanded decreases for these two reasons.
Demand
refers to the entire relationship between the price of a good and the quantity demanded of that good
Demand is illustrated by the demand curve and the demand schedule. The term “quantity demanded” refers to a ____________—the quantity demanded at a particular price.
Demand is illustrated by the demand curve and the demand schedule. The term “quantity demanded” refers to a point on a demand curve—the quantity demanded at a particular price.
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 schedule
lists the quantities demanded at each price when all the other influences on consumers’ planned purchases remain the same. (Check Fig 3.1 on Word document)
For example, if the price of a bar is 50¢, the quantity demanded is 22 million a week. If the price is $2.50, the quantity demanded is 5 million a week. The other rows of the table show the quantities demanded at prices of $1.00, $1.50, and $2.00.
Another way of looking at the demand curve is as a _____________________ curve
Another way of looking at the demand curve is as a willingness-and-ability-to-pay curve