Demand and Supply

• A functional market necessitates a property rights system.
• Economic agents are responsive to incentives.
• Incentives that individuals respond to include prices, income, time, and legal/regulatory frameworks.

Demand

• According to the law of demand, a change in the own-price results in an opposing change in quantity demanded.
• Movement occurs along the demand (marginal benefit) curve.
• The concept that price and quantity are related leads to downward-sloping demand curves, explained by the income and substitution effects and/or diminishing marginal utility.
• The summation of individual demand curves (schedules) yields the market demand curve (schedule).
• Shifts in the demand curve can result from changes in consumer demand determinants.

Supply

• A change in own-price causes quantity supplied to change in the same direction.
• Movement occurs along a supply curve.
• The summation of individual supply curves yields the market supply curve.
• The market supply curve slopes upward.
• The supply curve can shift when supply determinants change.

Price Elasticity of Demand

• Economists use elasticity to measure the extent of percentage changes in quantity due to own-price, income, and related goods prices.
• Price elasticity of demand calculates to the percentage change in quantity demanded/percentage change in price.
• Elasticity varies along a linear demand curve, indicating that slope is distinct from elasticity.
• Ranges of elasticity values are classified as elastic or inelastic, using 1 as the benchmark.
• Elastic demand > 1
• The demand is sensitive to price in the given range.
• Inelastic demand < 1
• The demand is not sensitive to price in the given range.
• Unit elastic demand = 1
• Price and demand are proportional.
• The price elasticity of demand depends on the availability of substitutes.
• The impact of a price change on total revenue or expenditure depends on whether demand is elastic, inelastic, or unit elastic.

Price Elasticity of Supply

• Price elasticity of supply calculates to the percentage change in quantity supplied/percentage change in price.
• Ranges of elasticity values are classified as elastic or inelastic, using 1 as the benchmark.
• Elastic supply > 1
• The supply is sensitive to price in the given range.
• Inelastic supply < 1
• The supply is not sensitive to price in the given range.
• Unit elastic supply = 1
• Price and supply are proportional.
• The price elasticity of supply depends on alternative inputs price.

Other Elasticities (Income and Cross-Price)

• Elasticity is measurable for any demand or supply determinant.
• Income elasticity of demand calculates to the percentage change in quantity demanded/percentage change in consumers' income
• Indicator of normal or inferior goods.
• Cross-price elasticity of demand calculates to the percentage change in the quantity demanded of one good/percentage change in the price of another good.
• Indicator of whether goods are substitutes, complements, or unrelated.

Market Equilibrium and Consumer and Producer Surplus

• The supply-demand model aids understanding the factors influencing prices and quantities and why these vary.
• In a perfectly competitive market, equilibrium is achieved with no shortages or surpluses.
• Equilibrium occurs when the price balances quantity supplied and demanded.
• Equilibrium price provides relevant data for economic decision-makers to guide resource allocation.
• Economists use consumer and producer surplus to measure the benefits of markets to buyers and sellers.
• Market equilibrium maximizes total economic surplus and efficiency in perfectly competitive markets without market failures.

Market Disequilibrium and Changes in Equilibrium

• Market imbalances create surpluses and shortages; market forces drive price and quantity toward equilibrium.
• Shifts in market demand and supply curves cause changes in price, quantity, consumer, producer, and total economic surplus.
• The price elasticities of demand and supply affect how the shifts impact.

The Effects of Government Intervention in Markets

• Government policies, such as price floors, price ceilings, and other forms of price and quantity regulation, affect incentives and outcomes in all market structures.
• Governments use taxes and subsidies to shift supply and demand curves.
• Taxes and subsidies affect government revenues or costs.
• Government intervention that produces the efficient quantity through taxes, subsidies, price controls, or quantity controls can decrease allocative efficiency.
• Deadweight loss represents losses to buyers and sellers after intervention in an efficient market.
• The incidence of taxes and subsidies imposed on traded goods in competitive markets depends on supply and demand elasticity.

International Trade and Public Policy

• International trade alterations in competitive markets can occur
• Equilibrium price due to trade can be higher or lower than without trade (autarky).
• The gap between domestic supply and demand is filled by trade.
• Opening an economy to trade affects consumer, producer, and total economic surplus.
• Tariffs affecting domestic price, quantity, government revenue, and consumer/total economic surplus are used to influence international trade.
• Quotas can alter quantities produced, thereby affecting price, consumer surplus, and total economic surplus.