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ECO 12 - 060 Chapter 3 Notes

by: Whitney Davis

ECO 12 - 060 Chapter 3 Notes Eco 060

Marketplace > Kutztown University of Pennsylvania > Eco 060 > ECO 12 060 Chapter 3 Notes
Whitney Davis
Kutztown University of Pennsylvania

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About this Document

Here's an outline for chapter 3
Dr. Sraiheen
Class Notes
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This 5 page Class Notes was uploaded by Whitney Davis on Tuesday February 2, 2016. The Class Notes belongs to Eco 060 at Kutztown University of Pennsylvania taught by Dr. Sraiheen in Winter 2016. Since its upload, it has received 25 views.

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Date Created: 02/02/16
Chapter 3: Demand and Supply Markets and prices  Market o Any arrangement than enables buyers and sellers to get information and to do business with each other o Market has 4 types 1. Perfectly competitive 2. Monopolistic competition 3. Oligopoly 4. Monopoly o Monopolistic competition and Oligopoly  Responsible for all markets in our economy o Competitive Market  A market that has many buyers/sellers, so no single buyer/seller can influence price o Price  The number of dollars that must be given up in exchange for  Economists refer to this as “money price” o Relative Price  The ratio of one price to another  Is an opportunity cost  Express relative price as a “basket”  Divide money price of good by money price of “basket” of all goods (price index)  Demand and supply model determines relative prices  Relative prices WILL fall  Its price will fall relative to the average price of other goods/services Demand 1. Want it 2. Can afford it 3. Plan to buy it  Shows the willingness and ability of buyers to purchase different quantities at different prices, holding other factors constant o Willingness is based on benefits received o Ability is whether you can afford it  Quantity Demanded o The amount of goods/services consumers plan to buy during a given time period at a particular price o Not necessarily the same as quantity bought  The Law of Demand o High price = Less demanded o Low price = More demanded  Why?  Substitution effect  Income effect o Substitution Effect  When price of good rises, its relative price (opportunity cost) rises o Income effect  When price of good rises, then the price rises relative to income  Higher price and unchanged income causes people to not be able to afford things they were able to buy before  Demand Curve o Shows relationship between quantity demanded of good, and its price  Change in Demand o When any factor that influences buying plans changes, other than price of good o If demand increases, then the curve shifts to the right, and quantity demanded price increases o Six factors of demand change  Prices of related goods  Expected future prices  Income  Expected future income/credit  Population  Preferences  Prices of Related Goods o Substitute  A good that can be used in place of another good  Is substitute price increases, the people buy less of substitute good o Complement  A good that is used in conjunction with another good  If price decreases, the people buy more of complement with good  Expected Future Prices o If expected future price of good rises, then opportunity cost is lower o Buyers buy more of good now before price rises  Income o Influences demand o When income increases consumers buy more of goods o When income decreases consumers buy less of goods o Increase of income does NOT increase the demand for all goods o Normal good  One for which demand increases as income increases o Inferior good  One for which demand decreases as income increases  Expected Future Income/Credit o If future income increases or credit becomes easier to get, then demand for a good may increase  Population o Larger the population, greater the demand for goods/services o Larger the proportion of population in given age group, greater the demand for goods/services used by age group  Preferences o Determine the value people place on each good/service  Change in Quantity demanded o A movement along the demand curve  Movement Along Demand Curve o A decrease in price of good increases quantity demanded of it  A Shift on Demand Curve o Demand increases, and demand curve shifts rightward o Demand decreases, and demand curve shifts leftward Supply  Reflects a decision about which technologically feasible items to produce  Quantity supplied o The amount that producers plan to sell during given time period at a particular price o Not necessarily the same amount as quantity sold  Law of Supply o Higher the price of good, greater the quantity supplied o Lower the price of the good, smaller the quantity supplied o Not worth producing good if price received for good does NOT at least cover marginal cost of producing it  Supply Curve o Supply  Refers to entire relationship between price of good and quantity supplied o Quantity supplied  Refers to point on supply curve o Minimum supply price  Minimum-supply-price curve  Shows lower price at which someone is willing to sell  Marginal cost  lowest price  Market Equilibrium o Equilibrium Price  The price at which quantity demanded = quantity supplied o Equilibrium quantity  Quantity bought and sold at equilibrium price o Price as Regulator  If price is too high, then quantity supplied exceeds quantity demanded  If price is too low, then the quantity demanded exceeds quantity supplied o Price Adjustments  Shortage  When price is below equilibrium  Surplus  When price is above equilibrium  Rising price reduces shortage  Decreases quantity demanded and increases quantity supplied  Falling price decreases surplus  Increases quantity demanded and decreases quantity supplied  Changes in Both Demand and Supply o When demand and supply change in same direction, equilibrium price changes in same direction o If demand increases more than supply, then price increases o If supply increases more than demand, then price decreases o If demand changes more than supply, then equilibrium quantity changes in same direction as demand o If supply changes more than demand, then equilibrium quantity changes in same direction as supply


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