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TEXTBOOK: Ch. 3 notes - Coggle Diagram
TEXTBOOK: Ch. 3 notes
market
Producers offer items for sale only if the price is high enough to cover their opportunity cost.
consumers respond to changing opportunity cost by seeking cheaper alternatives to expensive items.
vocab
competitive market:
has many buyers and many sellers, so no single buyer or seller can influence the price.
opportunity cost
: highest value alternative forgone
for example: when you buy a cup of coffee, the highest-valued thing you forgo is some gum, then the opportunity cost of the coffee is the quantity of gum forgone.
If the money price of coffee is $1 a cup and the money price of gum is 50¢ a pack, then the opportunity cost of one cup of coffee is two packs of gum. To calculate this opportunity cost, we divide the price of a cup of coffee by the price of a pack of gum and find the ratio of one price to the other.
relative price:
ratio of one price to another
relative price is an opportunity cost.
way of expressing a relative price is in terms of a “
basket
” of all goods and services
to calculate this relative price, we divide the money price of a good by the money price of a “basket” of all goods
price index
: "basket" of all goods
When we predict that a price will fall, we do not mean that its money price will fall—although it might. We mean that its
relative
price will fall.
price will fall relative to the average price of other goods and services.
Demand
quantity demanded is not necessarily the same as the quantity actually bought
Sometimes the quantity demanded exceeds the amount of goods available, so the quantity bought is less than the quantity demanded.
quantity demanded is measured as an amount
per unit of time
.
For example, suppose that you buy one cup of coffee a day. The quantity of coffee that you demand can be expressed as 1 cup per day, 7 cups per week, etc.
Many factors influence buying plans, and one of them is the price
look first at the relationship between the quantity demanded of a good and its price.
does the quantity demanded of a good change as its price changes?
law of demand
(assuming that there isn't a special case) the higher the price of a good, the smaller is the quantity demanded; the lower the price of a good, the greater is the quantity demanded.
Why does a higher price reduce the quantity demanded?
Substitution effect
Although each good is unique, it has substitutes—other goods that can be used in its place.
1 more item...
Income effect