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How do consumers and producers make choices in trying to meet their…
How do consumers and producers make choices in trying to meet their economic objectives?
Demand
Demand Curve
Movements along the demand curve
Shifts of the demand curve
Relationship between an individual consumer’s demand and
market demand
Non-price determinants of demand
Income of the consumers
Tastes and preferences
• Future price expectations
• Price of related goods (in the cases of substitutes and complements)
• Number of consumers
Producers make choices based on the consumer's demand: whether or not the consumers would want their products
The law of demand
as the price increases the demand decreases; it is in a inverse relationship.
Elasticities of demand
Percentage Change in Quantity Demanded
/
Percentage Change in Price
Determinants of PED
Number and closeness of substitutes
Degree of necessity
Time
Proportion of income spent on the good
Relationship between PED and total revenue
Importance of PED for firms and government decision-
making
Income Elasticity of Demand (YED)
Income elastic demand (services and luxury goods) and income inelastic demand (necessities)
Significance of sign
Positive YED (normal goods) and negative YED (inferior goods)
Less than one (necessities) and greater than one (services and luxury goods)
Supply
The law of supply
As price increases, the quantity supplied increases.
Supply curve
Movements along supply curve
Shifts of the supply curve
Relationship between an individual producer’s supply and market supply
Elasticity of Supply
Degrees of PES
Determinants of PES
Time
Mobility of factors of production
Rate at which costs increase
Unused capacity
Ability to store
Non-price determinants of supply
• Changes in costs of factors of production (FOPs)
• Prices of related goods (in the cases of joint and competitive supply)
• Indirect taxes and subsidies
• Future price expectations
• Changes in technology
• Number of firms
Market equilibrium
Market equilibrium
Producers would try to make choices so that their supply would meet the demand of the consumers: so that they won't waste or have a shortage of supplies
Functions of the price mechanism
• Resource allocation
Signalling
Incentive
• Rationing
Consumer and producer surplus
Social/community surplus
Allocative efficiency at the competitive market equilibrium
social/community surplus maximized at equilibrium
marginal benefit (MB) equals marginal cost (MC)
Changes in equilibrium
