Markets - Bring together buyers + sellers

• Highly competitive markets have large #s of independently acting buyers + sellers of standardized products

Demand - Schedule/curve showing various amounts of product that consumers willing + able to buy at several possible prices during a specific period of time

• Statement of buyer’s plans/intentions of purchase of product

Demand schedule - Illustrates quantity demanded of a good or service at different prices

Law of demand - Other things equal, as price falls, the quantity demanded rises (and vice versa)

• Inverse relationship

• Diminishing marginal utility - Each successive unit of product consumed → Buyers get less satisfaction

• Income effect - Lower price increases purchasing power of income → Buyer can purchase more of product than before (and vice versa)

• Substitution effect - Buyer has incentive to substitute less expensive products for similar products that are relatively more expensive

Demand curve - Quantity demanded on horizontal axis, price on vertical axis; downward slope reflects law of demand

• Increase in demand → Curve shifts right

• Decrease in demand → Curve shifts left

Add quantities demanded by all consumers at each possible price → Market demand

Determinants of demand - Other factors besides price that affect purchases; shifts the demand curve

• Consumer preferences

• Number of buyers

• Consumer incomes

  • Normal goods - Rise in income causes increase in demand

  • Inferior goods - Rise in income causes decrease in demand

• Prices of related goods

  • Substitute goods - Increase in price of one related good → Demand for other good increases

  • Complementary goods - Increase in price of one related good → Demand for other good decreases

  • Independent/unrelated goods

• Consumer expectations

Change in demand - Shift of demand curve to right/left

Change in quantity demanded - Movement from one point to another on a fixed demand curve (the same demand curve)

Supply - Schedule/curve showing various amounts of product that producers are willing + able to make available for sale at several possible prices during a specific period of time

Supply schedule - Illustrates quantity supplied of a good or service at different prices

Law of supply - Other things equal, as price rises, the quantity supplied rises (and vice versa)

Supply curve - Upward sloping; reflects law of supply

Sum quantities supplied by each producer at each price → Market supply

Determinants of supply - Other factors besides price that affect supply; shifts supply curve

• Resource prices

• Technology

• Taxes and subsidies

• Prices of other goods

• Producer expectations

• Number of sellers in the market

Change in supply - Shift of supply curve to right/left

Change in quantity supplied - Movement from one point to another on a fixed supply curve (the same supply curve)

Equilibrium price - Price where quantity demanded = quantity supplied

• Intersection of supply + demand curve

Equilibrium quantity - Quantity demanded and quantity supplied at the equilibrium price

Surplus - Quantity supplied exceeds quantity demanded; drives prices down

Shortage - Quantity demanded exceeds quantity supplied; drives prices up

Rationing function of prices - Competitive forces of supply + demand establish equilibrium price

Productive efficiency - Production of a good in the least-costly way

Allocative efficiency - Production of the particular mix of goods and services most highly valued by society

Demand reflects marginal benefit, supply reflects marginal supply

• MB = MC → Allocative efficiency

Changes in supply + demand

• Increase in demand → Increase in equilibrium price + equilibrium quantity

• Increase in supply → Decrease in equilibrium price + increase in equilibrium quantity

• Supply increase, demand decrease → Equilibrium price decrease, equilibrium quantity indeterminate

• Supply decrease, demand increase → Equilibrium price increase, equilibrium quantity indeterminate

• Supply increase, demand increase → Equilibrium price indeterminate, equilibrium quantity increase

• Supply decrease, demand decrease → Equilibrium price indeterminate, equilibrium quantity decrease

Price ceiling - Maximum legal price a seller can charge for a good or service

• Must be below equilibrium price to be binding

• Shortage

• Rationing problem - Gov’t must establish formal system of rationing in order to solve inequitable distribution of gasoline

• Black markets - Goods illegally bought and sold at prices above the legal limits

• Rent controls - Maximum rents established by law

Price floor - Minimum legal price a seller can charge for a good or service

• Must be above equilibrium price to be binding

• Surplus

  • Gov’t can solve surplus by either restricting supply or purchasing surplus output

• Distorts resource allocation