MICRO-3-4

• Demand is a schedule or a curve that shows the various amounts of a product that consumers are willing and able to purchase at each of a series of possible prices during a specified period of time.1
• The law of demand states that other things being equal, as price rises, quantity demanded falls.
• Income effect - when income increases, people can afford more goods so they buy more
• The substitution effect suggests that at a lower price buyers have the incentive to substitute what is now a less expensive product for other products that are now relatively more expensive
• Determinants of Demand are the other factors that affect demand
• Tastes of consumer refers to their preference for a product or service.
• An increase in the number of buyers in a market is likely to increase demand
• a rise in income causes an increase in demand.
• Prices of Related Goods refers to change in the price of a related good may either increase or decrease the demand for a product, depending on whether the related good is a substitute or a complement:
• substitute good is one that can be used in place of another good.
• complementary good is one that is used together with another good.
• A change in demand is a shift of the demand curve to the right (an increase in demand) or to the left (a decrease in demand).
• Supply is a schedule or curve showing the various amounts of a product that producers are willing and able to make available for sale at each of a series of possible prices during a specific period.
• As price rises, the quantity supplied rises; as price falls, the quantity supplied falls. This relationship is called the law of supply
• Determinants of Supply refers to the other factor that affects the supply
• Resource Prices refers to the prices of the resources used in the production process help determine the costs of production incurred by firms
• Technology enable firms to produce units of output with fewer resources.
• equilibrium price (or market-clearing price) is the price where the intentions of buyers and sellers match. It is the price where quantity demanded equals quantity supplied.
• productive efficiency: the production of any particular good in the least costly way
• allocative efficiency: the particular mix of goods and services most highly valued by society (minimum-cost production assumed).
• price ceiling sets the maximum legal price a seller may charge for a product or service.
• price floor is a minimum price fixed by the government. A price at or above the price floor is legal; a price below it is not.
• Demand-side market failures happen when demand curves do not reflect consumers’ full willingness to pay for a good or service
• Supply-side market failures occur when supply curves do not reflect the full cost of producing a good or service
• consumer surplus is defined as the difference between the maximum price a consumer is (or consumers are) willing to pay for a product and the actual price that they do pay.
• producer surplus is the difference between the actual price a producer receives (or producers receive) and the minimum acceptable price that a consumer would have to pay the producer to make a particular unit of output available
• efficiency losses— reductions of combined consumer and producer surplus
• private goods are the goods offered for sale in stores, in shops, and on the Internet.
• Rivalry (in consumption) means that when one person buys and consumes a product, it is not available for another person to buy and consume
• Excludability means that sellers can keep people who do not pay for a product from obtaining its benefits. Only people who are willing and able to pay the market price for bottles of water can obtain these drinks and the benefits they confer.
• Nonrivalry (in consumption) means that one person’s consumption of a good does not preclude consumption of the good by others. Everyone can simultaneously obtain the benefit from a public good such as national defense, street lighting, a global positioning system, or environmental protection
• Nonexcludability means there is no effective way of excluding individuals from the benefit of the good once it comes into existence. Once in place, you cannot exclude someone from benefiting from national defense, street lighting, a global positioning system, or environmental protection
• An externality occurs when some of the costs or the benefits of a good or service are passed onto or “spill over to” someone other than the immediate buyer or seller
• failures happen because producers do not take into account the costs that their negative externalities impose on others.
• These failures happen because market demand curves in such cases fail to include the willingness to pay of the third parties who receive the external benefits caused by the positive externality
• Pigovian Taxes refers to second policy approach to negative externalities is for government to levy taxes or charges specifically on the related good.