Microeconomics – Chapter 3

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 price is high enough to cover their opportunity cost.

Money Price – the price of an object that must be given up in exchange for it

Relative Price – ratio of one price to another/is an opportunity cost

Demand
1. Want it
2. Can afford it
3. Plan to buy it

Quantity Demanded – amount that consumers plan to buy during a given time period at a particular price/ measured as an amount per unit of time

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 greater is the quantity demanded.

Substitution effect – when the price of a good rises, the consumer has greater incentive to switch to a substitute

Income Effect – the good whose price has increased will be one of the goods people buy less of.
Consumers buy more of the cheaper item.

Demand – entire relationship between the price of a good and the quantity demanded of that god

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 a good

Six factors that bring Changes in demand:
1. Prices of related goods – prices of good consumer plans to buy depends in part on prices of substitutes of good

Substitute – good that can be used in place of another good

Complement – good that is used in conjunction with another good

2. Expected future prices – if expected future price of a good rises, opportunity cost of obtaining the good for future use is lower today than it will be in the future

3. Income – when income increases, consumers buy more of most goods and vice versa

Normal Good – one for which demand increases as income increases

Inferior Good – one fore which demand decreases as income increases

4. Expected future income and credit – when consumer is expected to earn more money, they purchase more now, before they receive the money

5. Population – larger population = greater demand/smaller population = less demand

6. Preferences – determines the value that people place on each good and service

Change in the quantity demanded = movement along the demand curve
Occurs when: the price of a good changes but no other influence on buying plan changes

Change in Demand = shift of the demand curve
Occurs when: price of a good remains constant but some other influence on buying plans changes
(six factors)

Supply
If a firm supplies a good or service, the firm:
1. Has the resources and technology to produce it
2. Can profit from producing it
3. Plans to produce it and sell it

Quantity Supplied – amount that producers plan to sell during a given time period at a particular price/measured as an amount per unit of time

Law of Supply Other things remaining the same, the higher the price of a good, the greater is the quantity supplied; and the lower the price of a god, the smaller is the quantity supplied.

Supply – relationship between price of a good and quantity supplied of it

Supply Curve –