Chapter 4 Market Forces of Supply and Demand Defining a market and competition Market a regular gathering of people for the purchase and sale of provisions livestock and other commodities Competition the rivalry among sellers trying to achieve such goals as increasing profits market share and sales volume by varying the elements of the marketing mix price product distribution and promotion Law of demand difference between movements and shifts Law of Demand Higher price for a good other things equal leads people to demand a smaller quantity of the good Price changes cause movement along a demand and supply curves not a shift Factors to cause the demand curve to shift Change of number of buyers Change of of related goods subs compliments Sub v Comp Shifts upward Change of income Normal Inferior goods If change falls shifts downward If change rises shift upward normal good Change of taste people like the good more it shifts upward Change in expectations Expect it to be more valuable shifts upward Supply curve The supply curve shows the amount of good or service suppliers will be willing and able to sell at a particular time at a particular price Factors to cause the demand curve to shift Change of Input raw materials Change of Technology more efficient less hourly wages to pay costs Change of Number of Sellers Change of expectation Equilibrium when price is the same for Qd Qs of that good Shortage prices are too low v selling too much for too little Surplus prices are too high selling for too much having excess goods left over Changes in Supply and Demand Increases in demand leads to higher e Q P Decrease in supply leads to higher eP and lower eQ Right to left Chapter 5 Elasticity and Its Application Defining and measuring the price elasticity of demand using midpoint formula measures how much Qd responds to a change in P measures the price sensitivity of buyers demand changeQd changeP PED drop minus sign Standard change end start start Midpoint change end start midp start end interchangable when comparing different goods the good s Qd that falls the most has the highest price elasticity because numerator is higher than denominator High Pe means bigger drop in Quantity demanded due to price raises Elastic inelastic unit elastic perfectly elastic and perfectly inelastic demand curves flat PED 1 1 1 0 infinity steep Four factors that determine the price elasticity of demand Price elasticity is higher when close substitutes are available Price elasticity is higher for narrowly defined goods than broadly defined ones Price elasticity is higher for luxuries than for necessities Price elasticity is higher in the long run than the short run Total revenue and price elasticity of demand Revenue P Q if Q change P change PES same as PED Qs changes easy more more elastic Two factors that determine the price elasticity of supply Time long term more elastic firms can create more factories to produce more quantities of goods easy s change Q producible easily supply more cars than beachfront more elastic Cross Price Elasticity of Demand measures the response of demand for one good to changes in the price of another good cQd good1 cP good2 Income Elasticity of Demand measures the Qd change in consumer income cQd cincome An increase in income causes an increase in demand for a normal good Hence for normal goods income elasticity 0 For inferior goods income elasticity 0 Chapter 6 7 Government Policies and Efficiency of Markets Price control law placed on prices Price ceilings binding v legal maximum on goods services ex rent control Price floors binding legal minimum on goods services ex minimum wage market outcomes Taxes gov can make buyers or sellers pay a specific amount on each unit effects of taxes on market outcomes taxers on buyers shifts dcurve taxes between d2 e d1 same Qd taxes on sellers shifts scurve taxes between d2 e d1 same Q Willingness to pay individual Consumer Surplus CS and Total CS Chapter 10 11 Externalities Public Goods and Common Resources Excludable and non excludable goods rival and non rival in consumption Defining characteristics of public goods and common resources Examples of public goods and common resources