Economics Chapter Markets and Demand

Markets

• A market is a group of buyers and sellers of a particular good or service.
• Markets can be highly organized, like agricultural commodities, or less organized, like a small ice cream shop.
• A competitive market has so many buyers and sellers that no individual buyer or seller can influence the market price.
• In a perfectly competitive market, buyers and sellers are price takers, meaning they must accept the prevailing market price.
• A monopoly is a market with only one seller who sets the price.

Demand

• The demand curve shows the relationship between the price of a good and the quantity demanded.
• Quantity demanded is the amount of a good that buyers are willing and able to purchase at a given price.
• The Law of Demand states that, other things being equal, the quantity demanded of a good falls when the price of the good rises.
• Market Demand is the sum of the demand from all individuals in the market.
• Factors that can affect market demand include income, prices of related goods, tastes, expectations, and the number of buyers.
• Movement along the demand curve represents a change in quantity demanded due to a change in price.
• Shift of the demand curve represents a change in demand due to factors other than price, such as income or consumer preferences.

Supply

• The supply curve shows the relationship between the price of a good and the quantity supplied.
• Quantity supplied is the amount of a good that sellers are willing and able to sell at a given price.
• The Law of Supply states that, other things being equal, the quantity supplied of a good rises when the price of the good rises.
• Market Supply is the sum of the supplies of all sellers.
• Factors that can shift the supply curve include input prices, technology, expectations, the number of sellers, and government policies.

Equilibrium

• Equilibrium is a state where the quantity supplied and quantity demanded are equal at a specific price.
• Equilibrium price is the price that balances quantity supplied and quantity demanded.
• Equilibrium quantity is the quantity supplied and demanded at the equilibrium price.
• Surplus occurs when the quantity supplied exceeds the quantity demanded.
• Shortage occurs when the quantity demanded exceeds the quantity supplied.

Elasticity

• Elasticity is a measure of the responsiveness of quantity demanded or quantity supplied to one of its determinants.
• Price elasticity of demand measures the responsiveness of quantity demanded to a change in price.
• Income elasticity of demand measures the responsiveness of quantity demanded to a change in income.
• Cross-price elasticity of demand measures the responsiveness of quantity demanded of one good to a change in the price of another good.

Total Revenue

• Total Revenue is the amount paid by buyers and received by sellers of a good, calculated as price times quantity (TR = P x Q).
• When demand is inelastic, price and total revenue move in the same direction.
• When demand is elastic, price and total revenue move in opposite directions.
• When demand is unit elastic, total revenue remains constant when price changes.

Other Demand Elasticities

• An inferior good has negative income elasticity of demand, meaning demand decreases as income rises (e.g., margarine).
• A normal good has positive income elasticity of demand, meaning demand increases as income rises (e.g., luxury goods).