Market equilibrium

Free market - any place where buyers meet to exchange good and services, free from market intervention (can be physically meeting or digital).

Equilibrium - where demand = supply

Disequilibrium - where demand doesn’t = supply

Excess demand = prices rise

Excess supply = prices fall

Consumer and producer surplus

Consumer surplus - the difference between the price consumers are willing to pay for a good/service and the price they actually pay

Producer surplus - difference between the price producers are willing and able to supply a good/service for and the price they receive

Society surplus = CS + PS (both triangles)

Interrelationship between markets

Joint demand

Joint demand for goods (complement goods) e.g printers and ink, coffee machines and capsules,razors and blades.

If demand for one of these goods goes down, the other one will also experience a dr=ecrease in demand.

An extension or contraction in the primary complementary good leads to a shift to the left or right in the secondary complementary good

Competitive demand

When goods rival each other e.g coke and pepsi or iphone and galaxy.

A contraction of demand in coke for example will lead to a shift to the right in the demand of pepsi and vice versa

Derived demand (input demand)

-When demand for something increases, demand for the input will increase too

Examples: aluminium and cars, holidays and airline travel

If demand shifts to the right for bread, the demand for wheat will also shift to the right

Composite demand

-Two goods require the same input, if there is an increase in production of one good, there will be decrease in supply of another ,e.g cheese and butter or bread and livestock because they both use the input

Joint supply

The increase in the production of one good (e.g honey and beeswax) will increase in the supply of another good

Price elasticity of demand

-PED measures the responsiveness of quantity demanded given to a change in price

PED= change in quantity demanded/change in price

% change = new-old/old

A PED number will always be negative

If ped number is:

-Greater than 1, price is elastic

-Less than one, price inelastic

-0, demand is perfectly price inelastic (qd won’t change at all regardless of price change)

-Infinite, demand is perfectly price elastic

-1, demand is unit price elastic