Supply and Demand
The law of Demand: As prices (that producers charge) increase, Quantity demanded decreases.
The law of Supply: As prices (that consumers are willing and able to pay) increase, Quantity Supplied increases.
1. Determinants of demand:
a. Change in number of buyers
b. Change in tastes
c. Change in income for Normal Goods.
d. Change in income for Inferior Goods.
e. Change in price of Substitute Goods.
f. Change in price of Complementary Goods.
g. Change in expectations of future income.
h. Change in expectation for future prices.
2. Determinants of Supply
a. Change in the number of producers.
b. Change in the costs of production (input costs).
c. Change in technology.
d. Change in the price of other goods the firm can produce (producer substitutes).
e. Change in producer expectations.
f. Change in taxes.
h. Supply Shocks
Consumer Surplus is defined as the highest price consumers are willing and able to pay for a good minus the price actually paid.
Producer Surplus is defined as the price received for selling their good minus the lowest price that they are willing and able to accept in order to produce and sell the good.
Price Controls: refer to the setting of prices by the government so that they are unable to adjust to their equilibrium level as determined by supply and demand. Price controls result in market disequilibrium.
Price Ceilings: Are a legal maximum price for a particular goods.
Price Floors: are legal minimum prices for a particular good.
Inferior good: Demand for the good decreases as consumer income increases.
1. Perfect Competition
a. There is a large number of firms in the industry
b. Each firm has NO control over the price at which it sells the product.
c. All the firms in the industry sell at standardized or identical product; from the consumers’ point of view it makes no difference from which firm they buy the product, as it is exactly the same in all firms; there are no brand names.
d. There are no barriers to entry in the industry.
a. There is a single firm in the industry
b. The firm has significant control over the price at which it product is sold in the market.
c. The firm produces and sells a unique good or service, which cannot be purchased elsewhere.
d. There are high barriers to entry in the industry.
3. Monopolistic Competition
a. There is a fairly large number of firms in the industry (not as large as in perfect competition)
b. Each firm has a substantial amount of control over the price at which its product is sold.
c. There is a product differentiation; this means that each firm in the industry tries to make its product different from those of the other firms in the industry; these different from those of the other firms in the industry; these differences may be in the many different characteristics of the product, the quality, the servicing or the packaging.
d. There are low barriers of industries.
a. There are a small number of large firms in the industry.
b. Firms have significant control over prices.
c. The products may be either differentiated or undifferentiated.
d. There are high barriers to entry; it is not easy for a new firm to enter and begin producing and selling in the industry.
Elasticity of Demand
Price Elasticity of demand is a measure of the responsiveness of the quantity of a good demanded to change in its price. In general, if there is a large responsiveness of quantity demanded, demand is referred to as being...
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