Economics Chapter: Supply and Demand

Supply and Demand

• Supply and demand are fundamental forces in market economies, influencing prices and quantities of goods and services.
• Supply represents the quantity producers are willing and able to offer at various prices. Higher prices generally increase supply.
• Demand represents the quantity consumers are willing and able to purchase at various prices. Lower prices generally increase demand.
• Market equilibrium occurs when quantity supplied equals quantity demanded, determining equilibrium price and quantity.
• Supply factors include production costs, technology, and government regulations.
• Demand factors include consumer preferences, income levels, and related goods' prices.
• Shifts in supply and demand curves change equilibrium price and quantity.

Market Structures

• Market structures describe market competition, impacting pricing and output.
• Perfect competition features numerous buyers and sellers, homogeneous products, free entry/exit, and perfect information. Firms are price takers.
• Monopolistic competition involves many firms, differentiated products, and relatively easy entry/exit. Firms have some price control through product differentiation.
• Oligopolies are dominated by a few firms, with homogeneous or differentiated products. Firms' decisions are interdependent.
• Monopolies have a single firm controlling the entire market, with no close substitutes. Firms have significant price control.

Elasticity

• Elasticity measures the responsiveness of one variable to changes in another.
• Price elasticity of demand measures how quantity demanded changes with price. Elastic demand: large % change in quantity for small % change in price. Inelastic demand: small % change in quantity for large % change in price.
• Income elasticity of demand measures the responsiveness of quantity demanded to changes in income.
• Cross-price elasticity of demand measures how quantity demanded of one good changes with the price of a related good.

Cost and Production

• Firms' production costs determine profitability and output decisions.
• Short-run costs vary with output. Fixed costs (e.g., rent) are constant, while variable costs (e.g., labor) change with output.
• Long-run costs can be adjusted for output changes.
• Economies of scale show decreasing average costs with increased output.
• Diseconomies of scale show increasing average costs with increased output.

Market Efficiency and Externalities

• Market efficiency means effective resource allocation that maximizes social welfare.
• Externalities are costs or benefits imposed on third parties not directly involved.
• Positive externalities (e.g., education) benefit society beyond participants.
• Negative externalities (e.g., pollution) impose costs beyond participants.
• Taxes or subsidies address externalities and promote market efficiency.

Government Intervention in Markets

• Governments influence markets with regulations, taxes, and subsidies.
• Regulations control market behavior with rules and standards.
• Taxes increase prices, reducing demand or supply.
• Subsidies lower prices, increasing demand or supply.
• Government intervention addresses market failures, protects consumers, prioritizes social goals, and achieves specific policies.

International Trade

• International trade involves exchanging goods and services across borders.
• Comparative advantage arises when a country produces a good at a lower opportunity cost than another. This promotes specialization and mutually beneficial trade.
• Tariffs and quotas restrict international trade, potentially benefiting domestic producers but harming consumers and overall welfare.

Market Failure

• Market failure occurs when markets allocate resources inefficiently without government intervention.
• Examples include externalities, public goods, imperfect information, and monopolies.

This quiz explores the fundamental concepts of supply and demand within a market economy. It covers the definitions, influencing factors, and the relationship between these forces that determine equilibrium price and quantity. Test your understanding of how market dynamics operate.