Micro Exam #3

Market Mechanism

A system where demand and supply forces determine the price and quantity of goods and services traded.

Equilibrium

The state where quantities demanded and supplied are equal, establishing a stable price.

Disequilibrium

Imbalances in markets that lead to price adjustments towards equilibrium.

Surplus

Excess supply due to a price above equilibrium, prompting sellers to lower prices.

Shortage

Insufficient supply at a price below equilibrium, causing price increases.

Elasticity

Measures the responsiveness of one variable to changes in another.

PED

Price Elasticity of Demand, showing how price changes affect quantity demanded.

PES

Price Elasticity of Supply, illustrating how price changes affect quantity supplied.

IED

Income Elasticity of Demand, indicating how income changes affect quantity demanded.

Characteristics of Goods

Steep demand for necessities with few substitutes, flat demand for luxuries with many substitutes.

Applications of Elasticity

Helps predict consumer behavior in response to price changes, useful for firms in setting prices.