Economics

Chapter Three

Special Note Regarding Demand and Supply

• Relative Prices

• A relative price is the ratio of one price to another

• If the price of a candy bar is $1 and the price of a fast food meal is $5, the relative price of a fast food meal is 5 candy bars.

• If the price of a hot dog is $2 and the price of a hamburger is $4, the relative price of a hot dog is1/2 of a hamburger

• The opportunity cost of good A in terms of good B is equal to the ratio of the price of good A to the price of good B.

• The opportunity cost of a hot dog in terms of hamburgers is the ratio of the price of a hot dog to the price of a hamburger.

• Demand

• Wants, as opposed to demands, are the unlimited desires of the consumer

• Demands differ from wants in that demands reflect a decision about which wants to satisfy and a plan to buy the good, while wants are unlimited and involve no specific plan to acquire the good.

• Scarcity guarantees that wants will exceed demands.

• The quantity demanded is the amount of a good that consumers plan to purchase at a particular price.

• The law of demand states that, other things remaining the same, the higher the price of a good, the smaller is the quantity of the good demanded.

• The law of demand implies that, other things remaining the same, as the price of a cheeseburger rises, the quantity of cheeseburgers demanded will decrease.

• The law of demand states that the quantity of a good demanded varies inversely with its price.

• The statement of for example, an increase in the price of a soda causes a decrease in the quantity of soda demanded, consistent with the law of demand.

• The law of demand implies that if nothing else changes, there is a negative relationship between the price of a good and the quantity demanded.

• The price of the good influences people’s buying plans and varies moving along a demand curve.

• The law of demand states that...