Chapter 3 - Supply And Demand Flashcards
What is a market
A market is any arrangement that enables buyers and sellers to get information and do business with eachother
What is a competitive market
A competitive market is a market that has many buyers and many sellers so no single buyer or seller can influence the price
What is the money price
The money price of a good is the amount of money needed to buy it
What is the relative price of a good
It is the ratio of its money price to the money price of the next best alternative good
The relative price of a good is ITS OPPORTUNITY COST.
What is a want
Wants are the unlimited desires or wishes people have for goods and services
What does demand reflect
Demand reflects a decision about which wants to satisfy
If you demand something, you…
Want it
Can afford it, and
Have made a definite plan to buy it
The quantity demand of a good or service is…
The amount that consumers plan to buy during a particular time period, at a particular time
The Law of Demand
Other things remaining the same, the higher the price of a good, the smaller the quantity demanded
And
The lower the price of a good, the larger the quantity demanded
Why does a change in the price change the quantity demanded?
Substitution income,
Income effect
What is Substitution Effect in terms of the law of demands?
When the relative price (opportunity cost) of a good or service rises, people seek substitutes for it, so the quantity demanded of the good or service decreases.
What is the Income Effect in terms of the law of demand?
When the price of a good or service rises relative to income, people cannot afford all the things they previously bought, so the quantity demand of the good or service decreases.
What does the term DEMAND refer to:
the entire relationship between the price of the good and the quantity demanded of the good.
What does the demand curve show
It shows the relationship between the quantity demanded of a good and its price when all other influences on consumers’ planned purchases remain the same.
A rise in price =
Other things remaining the same, brings a Decrease in QUANTITY DEMANDED (movement up along demand curve)
A fall in the price =
With all other things remaining the same, brings an increase in QUANTITY DEMANDED and a movement DOWN along the demand curve
Demand curve is also a…
Willingness and ability to pay curve
Marginal benefit curve —> willingness to pay measures marginal benefit
The smaller the quantity available,
The higher the price is that someone is willing to pay for another unit
Willingness to pay measures
Marginal benefit
When does a change in demand occur?
When some influence on buying plans other than the price of the good changes, there is a change in demand for that good.
When demand increases…
The demand curve shifts right wards
When demand decreases
The curve shifts left
What are the six main factors that change demand?
- the prices of related goods
- expected future prices
- income
- expected future income and credit
- population
- preferences
- Prices of related goods (in relation to factors that change demand)
When the price of a substitute for an item rises or when the price of a complement of an item falls, the demand for item increases
A substitute is
A good that can be used in place of another good
in relation to prices of related goods - factors that change demand
A complement is
A good that can be used in conjunction with another good
in relation to prices of related good from factors that change demand
2.Expected Future Prices (in relation to factors that change demand)
If the price of a good is expected to rise in the future, the current demand for the good increases and the demand curve shifts right
- Income (in relation to factors that change demand)
When income increases consumers buy more of most goods and the demand curve shifts rightward
A normal good is
one where the demand increases as income increases
An inferior good is
a good for which demand decreases as income increases
- Expected Future Income and Credit (in relation to factors that change demand)
When income is expected to increase in the future or when the credit is easy to obtain, the demand might increase now.
- Population (in relation to factors that change demand)
The larger the population, the greater is the demand for all the goods
- Preferences (in relation to factors that change demand)
People with the same income have different demands if they have different preferences
to calculate relative price in terms of two goods
divide price of one good by the price of the other
divide coffee price by tea price to get the relative price of coffee in terms of tea
