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Market
- Place where people exchange money for goods or services.
- Buyers and sellers exchange info and do business
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Competitive market
Loads of buyers and sellers so no single entity can influence price
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Money price
Amount of money needed to buy something
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Relative price
- Ratio of price against cost of next best alternative
- This is an opportunity cost
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Demand
- Want something, need it, plan to buy it
- Wants are unlimited desires or wishes
- Scarcity ensures many of our wants will go unfulfilled
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Quantity demanded
- Amount consumers plan to buy in a given periods at a particular price
- Measured in amount per unit of time
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Law of Demand
- All factors remaining the same, increased price leads to let quantity demanded
- 1. Substitution effect - higher price=higher opportunity cost, relative cost
- Higher opportunity cost means people will try to economize and switch to alternatives
- 2. Income effect - price roses relative to income
- If price is higher with same income, people can't afford the same things they usually buy
- Therefore quantity demanded decreases
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Substitution effect
higher price=higher opportunity cost, relative cost
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Income effect
- price roses relative to income
- If price is higher with same income, people can't afford the same things they usually buy
- Therefore quantity demanded decreases
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Demand
Relationship between price of good and quantity demanded of that good
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Demand curve
- Show's relationship between quantity demanded and price
- Price vertical, quantity horizontal
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Demand schedule
Table listing quantities bought at what price
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Change in demand
- Factor that influences change in buying plans other than price of good
- 6 in total. Price of related good, expected future price, income, expected future income, population, preferences
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1. Price of related goods
- Substitute, good that can be used in place of another good. Bus ride vs train ride
- Compliment, good used in conjunction with other good. Fries and hamburgers
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Substitute
- Good that can be used in place of another
- Train vs bus ride
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Compliment
- Good used in conjunction with other good
- Fries and hamburger
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2. Expected future price
- People buy more if price is expected to rise
- Oranges if frost occurs
- Computers always drop therefore current demand generally low
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3. Income
- More income = more goods purchased
- Normal good - if income high, demand high
- Inferior good - if income high, demand low. Eg. able to pay for plane ticket vs bus ticket
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Normal good
if income high, demand high
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Inferior good
- if income high, demand low.
- Eg. able to pay for plane ticket vs bus ticket
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4. Expected Future income and credit
if higher or more credit easily available, demand is high
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5. Population
Size and age structure
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Preferences
- Determine value people place on a good/service
- eg. depend on weather, info, fashion
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Change in quantity demanded
- movement ALONG demand curve
- decrease in qty demanded = up. higher price
- increase in qty demanded = down. lower price
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Shift of demand curve
- more demand = shift to the right
- less demand = shift to the left
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Qty supplied
- amount producers plan to make in a given period at a particular price
- not equal to qty sold
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Law of Supply
- other things remaining the same, higher price of good means higher qty supplied
- lower price of good, less qty supplied
- marginal cost of producing good up as qty goes up
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Supply
relationship b/w price of a good and qty supplied of it
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Supply curve
shows qty supplied vs price when nothing changes
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supply schedule
table listing data
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minimum supply price
- shows lowest price which producer will sell
- lowest price = marginal cost down
- lower qty = lower marginal cost and vice versa
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Change in Supply
- any factor that influences selling plans other than the price of good
- 6 main factors. Prices of factors of production, prices of related goods, expected future prices, # of suppliers, technology, state of nature
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1. Prices of Factors of Production
- factors used to produce goods - wages, supplies
- if factor increases, lowest price producer will accept increases
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2. Prices of Related Goods Increases
- firms switch what they produce
- supplements in production - goods can be produced w/ same resources
- complements in production - goods must be produced together
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supplements in production
goods can be produced w/ same resources
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complements in production
goods must be produced together
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3. Expected Future Prices
if good can be sold at higher prices in future, supply decreases now
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4. # of Suppliers
more firms producing = more qty, firms are willing to sell products at lower prices
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5. Technology
- how factors of production are used to make goods
- change occurs w/ innovation
- eg. new method used in factory
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State of Nature
all natural forces that affect production
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Change in Qty Supplied
- movement along supply curve
- this is a change in price
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Shift of Supply Curve
change in supply
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Equilibrium
- opposing forces balance each other out
- happens in mkt when buying and selling plans match
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equilibrium price
price at which qty demanded = qty supplied
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equilibrium qty
qty bought and sold at equilibrium price
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Price as a regulator (High vs low price)
- High price = too much qty supplied for demand
- Low price = more demand for supply
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Price adjustments
- shortage increases prices
- surplus forces prices down
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Predicting Changes
- Change in demand = increase qty, increase price. NOT change in supply
- Change in supply = increase qty, lower price
- *6 things can change supply and demand*
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