ECON 205 1st Edition Lecture 4 Outline of Last Lecture I Ceteris paribus other things remaining constant or the same II Markets coordinate the self interest of millions of people to achieve social goods the invisible hand does greed work III How about a command system or tampering with the laws of the market demand and supply IV The choice of alternatives trade offs production possibilities Outline of Current Lecture I Schedule of demand and supply II Shift or change in demand and supply III Market equilibrium IV Elasticity of supply and demand V Consumer and producer surplus VI Factors of production VII Role of government in a market economy price controls floor and ceiling VIII Equity fairness and Inequality Current Lecture I Schedule of demand and supply The demand curve has many points relating price and quantity demanded Quantity demanded usually decreases with price The supply curve has many points relating price and quantity supplied Quantity supplied usually increases with price II Shift or change in supply and demand A shift or change in supply and demand is a shift of the whole schedule Demand increases when income changes taste changes or habit changes Supply shifts when the cost of production shifts due to factors like new resource discovery or new innovations Technology is the main factor for supply increase III Market Equilibrium Market equilibrium is when both the buyer and seller are satisfied there is no further tendency to change IV Elasticity of Supply and Demand Elasticity is the sensitivity of supply and demand to change in price Perfectly elastic is when supply and or demand are very dependent on price Perfectly inelastic is when there is no change in supply and or demand due to price changes Normal elasticity is when demand and or supply shift with price In reality we cannot charge as much as we want We need either competition to bring a fair price or the government should regulate prices for an industry For example utilities cannot change price at free will they have to petition the government to change their prices V Consumer and producer surplus There are always consumer and producer surpluses Consumer surplus is the financial gain of consumers when they can buy a product for a lower price than the highest price that they would be willing to pay Producer surplus is the financial gain that producers get by selling at a market price higher than the minimum they would be willing to sell it for VI Factors of production The factors of production classically are labor manpower and the wages paid for laborers capital products created that produce more products like machinery and interest land and rent paid to use land and enterprise business and profit VII Role of government in a market economy price controls floor and ceiling A floor is the minimum price charged for a commodity while ceilings are the maximum prices for a commodity The government can regulate the market by prohibiting monopolies anti trust laws promoting competition taxing certain industries and introducing regulations When competition cannot be created those are natural monopolies The government sets a price for those services VIII Equity and inequality Equity means fairness It depends what one considers fair i e it is not fair to pay people the same for different amounts of work in a capitalist merit based system It can be defined empirically or by your value system Nordic countries have determined that every societal member should have a minimum amount of property and income so taxation is very high In other societies like America we have a socio capitalistic economy we have income for the poor minimum wage try to provide income for everyone income policy Inequality is unfair distribution