ECONS MYE

• Market


  Any kind of arrangement where buyers and sellers of goods, services or resources are linked together to carry out an exchange
• Law of Demand


  As the price of the good increases, quantity demanded falls; as the price falls, quantity demanded increases
• The higher the price of a good, the less of it consumers are willing and able to buy; as the price falls, the good becomes more affordable, and consumers are likely to want and be able to buy more of it
• Since marginal benefit falls as quantity consumed increases, the consumer will be induced to buy each extra unit only if its price falls
• Market demand


  The sum of all individual demands for a good
• Demand curve


  Represents the relationship between the price and the quantity demanded of a product, ceteris paribus
• Factors that shift demand

  • Income in the case of normal goods
  • Income in the case of inferior goods
  • Tastes
  • Price of substitute goods
  • Price of complementary goods
  • Demographic changes
• Movement along the demand curve


  Occurs when the price of a good changes, ceteris paribus, leading to a change in quantity demanded
• Shift of the demand curve

  Occurs when there is a change in a non-price determinant of demand, resulting in a shift of the entire demand curve
• Law of Supply


  As the price of the good increases, the quantity of the good supplied also increases; as the price falls, the quantity supplied also falls
• Market supply


  The sum of all individual firms' supplies for a good
• Supply curve


  Represents the relationship between the price and the quantity supplied of a product, ceteris paribus
• Factors that change supply

  • Cost of factors of production
  • Technology
  • Prices of related goods: competitive supply
  • Prices of related goods: joint supply
  • Producer (firm) expectations
  • Taxes
  • Subsidies
  • The number of firms
  • Shocks, or sudden unpredictable events
• Movement along the supply curve


  Occurs when there is a change in price, leading to a change in quantity supplied
• Shift of the supply curve

  Occurs when there is a change in a non-price determinant of supply, resulting in a shift of the entire supply curve
• Market equilibrium


  When quantity demanded is equal to quantity supplied - the forces of supply and demand are in balance, and there is no tendency for the price to change
• Surplus


  There will be a downward pressure on the price, which will keep falling until it reaches the point where quantity demanded is equal to quantity supplied, and the surplus is eliminated
• Shortage


  There will be an upward pressure on price, which will keep increasing until the shortage is eliminated; this will happen when quantity supplied is exactly equal to quantity supplied
• Increase in demand


  Demand curve shifts to the right, resulting in a higher equilibrium price and quantity
• Scarcity


  Limited amounts of resources, necessitating choices on how to best allocate resources
• Opportunity cost


  The foregone (or sacrificed) alternatives that could have been chosen instead
• Price signalling function


  Prices communicate information to decision-makers
• Price incentive function


  Prices motivate decision-makers to respond to the information
• Consumer surplus


  The highest price consumers are willing to pay for a good minus the price actually paid
• Producer surplus


  The price received by firms for selling their good minus the lowest price that they are willing to accept to produce the good
• Allocative efficiency


  The best allocation of resources from society's point of view, where social (community) surplus is maximized (marginal benefit = marginal cost)
• Social surplus, defined as the sum of consumer plus producer surplus, is maximized at the point of competitive market equilibrium
• Marginal benefit (MB)


  The additional benefit to society of producing one more unit of the good
• When MB > MC, society would be placing a greater value on the last unit of the good produced than it costs to produce it, and so more of it should be produced
• If MC > MB, then it would be costing society more to produce the last unit of the good produced than the value society puts on it, and so less should be produced
• If MC = MB, then just the 'right' quantity of the good is being produced
• Allocative efficiency


  Producing the quantity of goods mostly wanted by society at the lowest possible cost. Society is making the best possible use of its scarce resources
• Price Elasticity of Demand (PED)

  A measure of the responsiveness of the quantity of a good demanded to changes in its price
• The PED value is treated as if it were positive although its mathematical value is usually negative
• Price elastic demand


  • A large responsiveness of quantity demanded due to change in price
• Price inelastic demand


  • A small responsiveness of quantity demanded due to change in price
• Unit elastic demand


  • Demand is neither elastic nor inelastic
• Perfectly elastic demand


  • Quantity demanded changes infinitely with any change in price
• Perfectly inelastic demand


  • Quantity demanded does not change at all with changes in price
• Determinants of PED


  • Number of substitutes
  • Closeness of substitutes
  • Degree of necessity (necessities vs luxuries)
  • Length of time
  • Proportion of income spent on a good