Markets

Market

Any arrangement where buyers and sellers come together to exchange goods or services at an agreed price.

Demand

The quantity of a good or service that consumers are ready and willing to buy

Law of Demand

price and demand are inversly proportionate

Supply

The quantity of a good or service that producers are ready

Law of Supply

Price and supply are directly proportionate

Market Equilibrium

The price and quantity at which the quantity demanded equals the quantity supplied - there is no surplus or shortage.

Surplus (Excess Supply)

When quantity supplied exceeds quantity demanded at a given price

Shortage (Excess Demand)

When quantity demanded exceeds quantity supplied at a given price

Price Mechanism

The process by which changes in price coordinate the decisions of buyers and sellers to reach equilibrium.

Contraction of Demand

A movement UP and along the demand curve caused by a RISE in price - less is demanded.

Extension of Demand

A movement DOWN and along the demand curve caused by a FALL in price - more is demanded.

Increase in Demand

A RIGHTWARD SHIFT of the entire demand curve caused by a non-price factor - more is demanded at every price.

Decrease in Demand

A LEFTWARD SHIFT of the entire demand curve caused by a non-price factor - less is demanded at every price.

Price Elasticity of Demand (PED)

A measure of the responsiveness of quantity demanded to a change in price. Calculated as: % change in $Qd\div\%$ change in Price.

Elastic Demand

When a change in price causes a proportionately larger change in quantity demanded. $PED>1$.

Inelastic Demand

When a change in price causes a proportionately smaller change in quantity demanded. $PED<1$.

Unit Elastic Demand

When a change in price causes exactly the same proportionate change in quantity demanded. $PED=1$.

Price Elasticity of Supply (PES)

A measure of the responsiveness of quantity supplied to a change in price. Calculated as: % change in $Qs\div\%$ change in Price.

Substitutes

Goods that can be used in place of each other (e.g. Pepsi and Coke). A rise in the price of one increases demand for the other.

Complements

Goods that are used together (e.g. cars and petrol). A rise in the price of one decreases demand for the other.

Opportunity Cost

The value of the next best alternative forgone when making an economic decision.

Market Failure

When the price mechanism fails to allocate resources efficiently

Externality

A cost or benefit that affects a third party not involved in the market transaction. Can be negative (e.g. pollution) or positive (e.g. education).

Merit Good

A good or service that society considers beneficial and that is likely to be under-consumed if left to the market (e.g. vaccinations

Public Good

A good that is non-excludable and non-rival in consumption. The market under-provides these (e.g. national defence

Price Ceiling (Maximum Price)

A government-imposed MAXIMUM price set below equilibrium

Price Floor (Minimum Price)

A government-imposed MINIMUM price set above equilibrium

Perfect Competition

A market with many small sellers of identical products

Monopoly

A market with a single dominant seller

Oligopoly

A market dominated by a small number of large firms

Monopolistic Competition

A market with many firms selling slightly differentiated products with relatively low barriers to entry.

Factors affecting demand

price, income, population, tastes, prices of substitutes and complements, expected future prices

Factors affecting supply

price/cost of factors of production, prices of substitutes and complements, expected future prices, number of suppliers, technology

Factors affecting elasticity of demand

Whether the good is a luxury or a necessity

Existence of close substitutes

Proportion of income spent on the good

The length of time since a price change

Factors affecting elasticity of supply

Ability to hold and store stock

Excess production capacity

The length of time since a price increase