Unit 2: Market Forces

Money income vs. Real income

money income is used to maximize real income

Substitution Effect

Change in prices of related goods can affect the demand

Law of Diminishing Marginal Utility

The more you consume a thing the less you want it

Marginal Utility

satisfaction you get from an additional unit of a product

Law of Demand

quantity demanded is inversely related to the price

When is demand elastic?

when a change in price greatly affects the amount of people willing to buy a good

When is demand inelastic?

when a change in price does not greatly affects the amount of people willing to buy a good

Supply

The willingness and ability of producers to offer goods and services for sale

Law of Supply

the quantity supplied is usually directly related to the price

Supply Schedules and Curves

Quantities of a good supplied at various prices

Marginal Revenue

market value of the unit

Marginal Cost

change in total cost divided by change in quantity

Market Equilibrium

demand equals supply

surplus

amount supplied exceeds quantity demanded

shortage

quantity demanded exceeds the amount supplied

what changes can affect demand other than price and quantity?

consumer income, price of related goods, size or composition of population, consumer expectations, consumer tastes

Increase in demand

Rightward shift in demand curve

Decrease in demand

leftward shift in demand curve

what changes can cause shifts in supply other than price and quantity?

cost of resources, changes in tech, producer expectations, number of producers in market

Increase in Supply

Rightward shift in supply curve

Decrease in supply

leftward shift in supply curve

Four Market Structures

Perfect, Monopoly, Imperfect, Oligopoly

How does the US govt encourage a competitive economy?

antitrust laws

perfect competition

many buyers and sellers, uniform, no control

monopoly

one seller and many buyers, unique product, complete control

imperfect competition

many buyers and sellers, some variety in products, limited control

oligopoly

few sellers and many buyers, some variety in products, some control