Key Principles and Factors in Economics: Demand, Supply, and Market Efficiency

Principles that underlie the economics of individual choice

1. Resources are scarce

2. The real cost of something is what must be given up to get it(opportunity cost)

3. "How much?" is a decsion at the margin. rational people think at the margin

4. People respond to incentives

principles that underlie the interaction of individual choices

1. there are gains from trade

2. Markets move towards equilibrium

3. resources should be used as efficiently as possible

4. markets usually lead to efficiency

5. When markets don't achieve efficiency, government intervention can improve society's welfare

Factors of demand curve shift

1. changes in the price of related goods

2. changes in income

3. changes in taste

4. changes in expectations

5. changes in number of consumers

factors of supply curve shift

1. changes in natural conditions for production

2. changes in input prices

3. changes in the prices of related goods or services

4. changes in technology

5. changes in expectations

6. changes in number of producers

7. changes in taxes or cost of government regulation

Determinants of elasticity of demand

1. whether close substitutes are available

2. whether the good is a necessity or a luxury

3. share of income spent on the good

4. time elapsed since price change