University of Regina

Key Concepts in Microeconomics

Positive Relationship: There is a positive correlation between income (I) and quantity demanded (Q). As income increases, the quantity demanded also increases, typically represented by a positively sloped demand curve.
Graphical Representation: The slope of the demand curve represents how much Q changes with a change in I (Change in Q / Change in I).
Elasticity: Defined as percentage change in Q divided by percentage change in I. This is crucial for businesses to forecast demand based on consumer income changes.

Normal Goods: When income increases, demand for normal goods increases.
Inferior Goods: When income increases, demand for inferior goods decreases.
Elasticity Interpretation: Income elasticity greater than 1 indicates luxury goods, while less than 1 suggests necessities.

Complements: The demand for complements shows a negative relationship; if the price of one good (e.g., hot dogs) increases, the quantity demanded for the complement decreases.
Substitutes: Shows a positive relationship; if the price of one good (e.g., steak) increases, the quantity demanded for a substitute (e.g., chicken) increases.
Cross-Price Elasticity: Positive for substitutes and negative for complements.

Elastic Demand: Quantity demanded changes significantly with price changes (elasticity > 1).
Inelastic Demand: Quantity demanded doesn't change much with price changes (elasticity < 1).
Calculating Elasticity: Can be calculated using change in Q / change in P, alongside average price and quantity values when necessary (midpoint formula).

Cost of Production: Major determinant; as production costs increase, the supply curve shifts left (decrease in supply).
Productivity: If productivity increases, the supply curve shifts right (increase in supply).
Expectations: Firms might adjust current supply based on anticipated future price changes.
Economies of Scope: Companies may find it cheaper to produce additional products using existing resources, affecting supply curves.

Equilibrium: Exists at the price where quantity supplied equals quantity demanded. Represents the optimal allocation of resources between buyers and sellers.
Surplus: Occurs when the quantity supplied exceeds quantity demanded at a given price, often leading firms to lower prices.
Shortage: Occurs when quantity demanded exceeds quantity supplied, typically leading to price increases as consumers bid higher.

Income changes can shift demand, affecting overall market welfare - understanding these shifts is crucial for predicting market behavior.

Both demand and supply are influenced by various external factors (income, price of related goods, production costs).
The analysis involves understanding changes in price and quantity in response to shifts in these factors.
Increases in demand lead to higher prices and quantities, while increases in supply lead to lower prices and higher quantities.

Elasticity provides insights into consumer behavior and how demand reacts to changes in price and income, impacting business strategies.
Understanding how shifts occur helps firms in forecasting production needs and managing pricing strategies effectively.