Lecture #4 Flashcards
What is a market?
A market is any arrangement that enables buyers and sellers to get information and do business with each other.
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 relative price?
The relative price of a good-the ratio of its money price to the money price
of the next best alternative good-is its opportunity cost.
If you demand something then you…
- want it
- can afford it
- have a definite plan to buy it
The law of demand states
- the higher the price of the good, the smaller the quantity demanded
AND
the lower the price of the good, the larger the quantity demanded.
What are the two reasons a change in price change the quantity demanded?
- substitution effect; when the price of a good rises, people will seek substitutes
-Income effect: when the price of a good rises relative to income, people cannot afford all the things they previously bought.
What does the demand curve show
The demand curve shows the relationship between quantity demanded and its price.
A demand curve is also a ….. curve
Willingness and ability to pay: the smaller the quantity available, the higher the price someone is willing to pay. Willingness to pay measures marginal benefit.
when demand increases the demand curve shifts…
rightward
when the demand decreases, the demand curve shifts…
leftward
factors that change demand
-price of related goods
-expected future prices
-income
-preferences
Formula for relative price (good A)
money price Good A/ money price Good B
demand and price have an …. relationship
inverse
” A change in quantity demanded”
- caused by a change in price
-movement along the demand curve
“change in demand”
- change in “non-price” variable ( increase in income)
-shift of the demand curve
