Principles of Microeconomics Chapter 3

Market Concepts

• Market: Comprises all buyers and sellers of a particular good.
• Market Equilibrium: Achieved when all buyers and sellers are satisfied at a market price, with quantity supplied equaling quantity demanded.

Demand and Supply Curves

• Demand Curve: Visual representation showing the quantity of a good that buyers want to purchase at various prices.
• Supply Curve: Graph illustrating the quantity that sellers are willing to sell at different price levels.

Demand Changes

• Substitution Effect: Change in quantity demanded due to buyers switching between goods based on price fluctuations.
• Income Effect: Change in demand driven by how price alterations impact buyers' purchasing power.
• Change in Demand: A complete shift in the demand curve, indicating varied buyer preferences at the same price.
• Change in Quantity Demanded: Movement along the demand curve as a result of a price change.

Supply Changes

• Change in Supply: The entire supply curve shifts, reflecting a change in sellers' willingness to sell at various prices.
• Change in Quantity Supplied: Movement along the supply curve due to price adjustments.

Reservation Prices

• Buyer's Reservation Price: Maximum price a buyer is willing to pay for a good.
• Seller's Reservation Price: Minimum price a seller would accept, typically linked to marginal cost.

Surplus and Shortage

• Excess Supply: Occurs when quantity supplied exceeds quantity demanded at a price above equilibrium, leading to surplus.
• Excess Demand: Happens when quantity demanded surpasses quantity supplied at a price below equilibrium, creating shortages.

Economic Efficiency and Surplus

• Buyer's Surplus: The difference between what a buyer is willing to pay versus what they actually pay.
• Seller's Surplus: The difference between the received price and the seller's minimum acceptable price.
• Total Surplus: The overall difference between buyer's and seller's reservation prices.
• Socially Optimal Quantity: The quantity that maximizes total economic surplus in production and consumption.
• Efficiency: Occurs when goods are produced and consumed at optimal levels.

Price Controls

• Price Ceiling: Legally established maximum price for a good, intended to prevent prices from rising too high.

Goods Classification

• Normal Good: Demand increases when buyers' incomes rise; demand declines as incomes fall.
• Inferior Good: Demand decreases as buyers' incomes increase; demand rises when incomes decline.
• Complements: Goods where an increase in price for one leads to a decrease in demand for the other.
• Substitutes: Goods where a price rise in one may increase demand for the other.

Economic Principles

• Efficiency Principle: Suggests that overall economic improvement allows for better distribution among individuals.
• Equilibrium Principle: Indicates that markets can reach a state without wasted opportunities but may not capture all available collective benefits.
• Cash on the Table: Represents potential economic gains that remain untapped in a transaction.