1Econ 200 Final Study GuideMitchell ReichenbergChapter 4: The Market Forces of Supply and DemandI. What is a Market?a. Market : group of buyers and sellers of a particular good or servicei. Buyers determine demandii. Sellers determine supplyII. What is Competiton?a. Price and quantity is determined by all buyers and sellersb. Competitive Market : market in which there are many buyers and sellers so that each has a negligible impact on the market pricei. Sellers have limited control of priceii. Buyers cannot individually influence pricec. Perfectly Competitivei. Goods offered for sale are all the sameii. Buyers and sellers are so numerous that no single buyer or seller has influence the market priceiii. Both buyers and sellers are Price Takers: must accept price themarket determinesd. Monopoly : market with only one sellerIII. The Demand Curve: The Relationship Between Price and Quantity Demandeda. Quantity Demanded : the amount of any good that buyers are willing and able to purchaseb. Law of Demand : claim that, other things equal, the quantity demandedof a good falls when the price of the good risesc. Demand Schedule : table that shows the relationship between the price of a good and the quantity demandedd. Demand Curve : graph of the relationship between the price of a food and the quantity demandedIV. Market Demand vs. Individual Demanda. Market Demand : sum of all the individual demands for a particular good or serviceV. Shifts in the Demand Curvea. Increase in Demand : any change that increases quantity demanded at every price shifts the demand curve to the rightb. Decrease in Demand : and change that reduces the quantity demanded at every price shifts the demand curve to the leftc. Variables That Shift Demand Curvei. Income1. Normal Good : good where increase in income leads to increase in demand2. Inferior Good : good where increase in income leads to decrease in demand2ii. Price of Related Goods1. Substitutes : two goods where increase in price of one leads to increase in demand for the othera. Often pairs of goods that are used in place of each other (hot dogs and hamburgers, etc.)2. Compliments : two goods where increase in the price of one leads to decrease in demand for the othera. Often pairs of goods that are used together (gas and cars)iii. Tastesiv. Expectationsv. Number of Buyersd. Changes in the price of the good itself cause a movement along the demand curveVI. The Supply Curve: The Relationship between Price and Quantity Supplieda. Quantity Supplied : amount of a good that sellers are willing and able to sellb. Law of Supply : claim that, other things equal, the quantity supplied of a good rises when the price of the good risesc. Supply Schedule : table that shows the relationship between the price of a good and the quantity suppliedd. Supply Curve : graph of the relationship between the price of a good and the quantity suppliedVII. Market Supply vs. Individual Supplya. Market Supply : sum of the supplies of all sellersVIII. Shifts in Supply Curvesa. Increase in Supply : any change that raises quantity supplied at every price shifts supply curve to the rightb. Decrease in Supply : any change that reduces quantity supplied at every price shifts supply curve to the leftc. Variables That Shift Supply Curvei. Input Pricesii. Technologyiii. Expectationsiv. Number of Sellersd. Changes in the price of the good itself causes a movement along the supply curveIX. Supply and Demand Togethera. Equilibrium : situation where the market price has reached the level atwhich quantity supplied equals quantity demandedb. Equilibrium Price : the price that balances quantity supplied and quantity demandedc. Equilibrium Quantity : the quantity supplied and demanded at the equilibrium priced. Surplus : situation where quantity supplied is greater than quantity demanded3i. Also called Excess Supplye. Shortage : situation where quantity demanded is greater than quantitysuppliedi. Also called Excess Demandf. Law of Supply and Demand : claim that the price of any good adjusts tobring the quantity supplied and quantity demanded for that good into balanceX. Analyzing Changes in Equilibriuma. Shifts in Curves vs. Movements Along Curvesi. Shift in Supply Curve: change in supplyii. Shift in Demand Curve: change in demandiii. Movement Along Supply Curve: change in quantity suppliediv. Movement Along Demand Curve: change in quantity demanded4Chapter 5: Elasticity and Its ApplicationI. The Price Elasticity of Demand and Its Determinantsa. Elasticity : measure of the responsiveness of quantity demanded or quantity supplied to a change in one of its determinantsb. Price Elasticity of Demand (PED) : measure of how much the quantity demanded of a good responds to the change of price of that goodi. % change in QD/ % change in P1. Always positive numbers (absolute value)ii. Elastic : QD responds substantially to the changes in priceiii. Inelastic : QD responds only slightly to changes in pricec. Goods with close substitutes tend to have more elastic demandd. Necessities tend to have inelastic demandse. Luxuries tend to have elastic demandsf. Narrowly defined markets tend to have more elastic demands than broadly defined marketsg. Goods tend to have more elastic demand over longer time horizonsII. The Midpoint Methoda. PED={(Q2-Q1)/[(Q2+Q1)/2]}/{(P2-P1)/[(P2+P1)/2]}III. The Variety of Demand Curvesa. Elastic: when elasticity is greater than 1b. Inelastic: when elasticity is less than 1c. Unit Elastic : when elasticity is equal to 1d. Perfectly Inelastic : when elasticity equals zero (vertical curve)e. Perfectly Elastic : when elasticity equals infinity (horizontal curve)IV. Total Revenue and the Price Elasticity of Demanda. Total Revenue (TR) : amount paid by buyers and received by sellers of a good i. TR=PQb. General Rulesi. When demand is inelastic, price and total revenue move in the same directionii. When demand is elastic, price and total revenue move in opposite directioniii. When demand is unit elastic, total revenue remains constant when price changesV. Elasticity and Total Revenue Along a Linear Demand Curvea. Slope of linear demand curve is constant, but elasticity is notVI. Other Demand Elasticitiesa. Income Elasticity of Demand : measure of how much the quantity demanded of a good responds to a change in consumers incomei. % change in QD/ % change in incomeii. Normal Goods have positive income elasticitiesiii.
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