Microeconomics Notes 1.1: Competitive Markets: Demand and Supply

Microeconomics

study of behavior of firms, individual consumers and industries and the determination of market prices and quantities of goods and services, and factors of production.

Market

situation where potential buyers and potential sellers come together to establish an equilibrium price and quantity for a good or service. This allows an exchange to take place, and it enables the needs and wants of both parties to be fulfilled.

Demand

willingness and ability to purchase a good or service at a certain price over a given time period.

Law of demand

states as the price of a good falls, the quantity demanded of the product normally increases, ceteris paribus.

Change in demand

caused by a change in non-price factor, and it is represented by a shift of the demand curve.

Change in quantity demanded

caused by a change in price, and it is represented by a movement along the demand curve.

Supply

willingness and ability to produce a quantity for a good or service at a given price, in a given time period.

Law of supply

states as the price of the good rises, the quantity supplied of the product normally increases, ceteris paribus.

Change in supply

caused by a change in non-price factor, and it is represented by a shift of the supply curve.

Change in quantity supplied

caused by a change in price, and it is represented by a movement along the supply curve.

Market equilibrium

situation where prices are stable, and the quantity of goods and services supplied is equal to the quantity demanded.

Consumer surplus

extra satisfaction gained by consumers from paying a price that is lower than that which they were prepared to pay. It is shown by an area under the demand curve and above the equilibrium price.

Producer surplus

excess of actual earnings that a producer makes from a given quantity of output, over and above the amount the producer would be prepared to accept for that output. It is shown by an area above the supply curve and under the equilibrium price.

Allocative efficiency

when resources are allocated in the most efficient way from society’s point of view, and occurs when demand equals supply and community surplus is maximized.