Download Price of related goods

By: Jane Buttarazzi
AP ECON FINAL PROJECT
EFFICIENCY (PRODUCTIVE VS. ALLOCATIVE)
Productive efficiency occurs when the
economy is utilizing all of its resources
efficiently, and getting the most output for
the least input.
 Allocative efficiency is a type of efficiency in
which the economy/producers produce only
that type of good which are more desirable
in society. The point of allocative efficiency is
where price equals marginal cost (P=MC)

LAW OF DEMAND
An economic law that states that consumers buy
more of a good when its price decreases and less
of the same good when its price increases.
 If the income of the consumer, prices of the
related goods, and tastes and preferences of the
consumer remain unchanged, the consumer’s
demand for the good will move opposite to the
movement in the price of the good.
 For example: if someone was buying noodles, they
would demand more noodles if the price were two
dollars than if the price for them were four dollars.
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ABSOLUTE PRICE VS. RELATIVE PRICE
The absolute price is the amount that you pay for a
good or service in a definite amount in the form of
currency.
 For example: if you went to buy a smoothie and paid
for it with a five dollar bill.
 The relative price is the price of a good or service in
terms of another. In other words, a comparative ratio.
The leftover ratio is the opportunity cost.
 For example, if the price of gasoline is $0.25 per
gallon and the wage rate is $1.00 per hour then the
relative price of gasoline is 0.25 hours of labor per
gallon.

SUBSTITUTION EFFECT
The idea that as prices rise (or incomes
decrease) consumers will replace more
expensive items with less costly alternatives.
 For example: If a person was demoted to a
lower paying job, instead of buying coca-cola for
their house, they might replace that with an
inferior good such as the store brand version of
coke.

INCOME EFFECT
The income effect is the change in an individual's
income and how that change will impact the quantity
demanded of a good or service. The relationship
between income and the quantity demanded is a
positive one, as income increases, so does the
quantity of goods and services demanded.
 For example: if a consumer spends one-half of his or
her income on bread alone, a fifty-percent decrease
in the price of bread will increase the free money
available to him or her by the same amount which he
or she can spend in buying more bread or something
else.

DEMAND CURVE (SCHEDULE)
The graph depicting the relationship between the
price of a certain commodity, and the amount of it
that consumers are willing and able to purchase
at that given price. It is a graphic representation
of a demand schedule.
 Demand curves are used to estimate behaviors in
competitive markets, and are often combined with
supply curves to estimate the equilibrium price.

DETERMINATES OF DEMAND
1. Income: A rise in a person’s income will lead to an increase in demand (shift
demand curve to the right), a fall will lead to a decrease in demand for normal
goods.
2. Consumer Preferences: Favorable change leads to an increase in demand,
unfavorable change lead to a decrease.
3. Number of Buyers: the more buyers lead to an increase in demand; fewer buyers
lead to decrease.
4. Price of related goods:
a. Substitute goods: price of substitute and demand for the other good are
directly related.
Example: If the price of coffee rises, the demand for tea should increase.
b. Complement goods: price of complement and demand for the other good are
inversely related.
Example: if the price of ice cream rises, the demand for ice-cream toppings will
decrease.
5. Expectation of future:
a. Future price: consumers’ current demand will increase if they expect higher
future prices; their demand will decrease if they expect lower future prices.
b. Future income: consumers’ current demand will increase if they expect higher
future income; their demand will decrease if they expect lower future income.
NORMAL GOODS VS. INFERIOR GOODS
Normal goods are any goods for which demand
increases when income increases and falls when
income decreases but price remains constant.
 Inferior goods are any goods for which demand
decreases when income increases and increases
when income decreases but price remains constant.
 For example: if you chose to buy a new designer pair
of shoes from the store, rather than a used pair of
shoes, then that would mean you chose the normal
good over the inferior good. The normal good was the
new pair of designer shoes, and the inferior good was
the used pair of shoes.
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