ECC1000 Chapter Notes - Chapter 2: Deadweight Loss, Resource Allocation, Marginal Cost
7 Jun 2018
School
Department
Course
Professor
PRINCIPLES OF MICROECONOMICS (ECC1000) – TOPIC SUMMARIES
TOPIC 2 – HOW MARKETS WORK
CHAPTER 3 – Demand and supply
Markets and prices
• A competitive market had many buyers and sellers and no one individual can
influence the price
• Opportunity cost is a relative price
• Demand and supply determine relative prices
Demand
• Demand is the relationship between the quantity demanded of a good and its prices
when all other influences on buying plans remain the same
• The higher the price of a good, other things remaining the same, the smaller is the
quantity demanded – the law of demand
• Demand depends on the prices of substitutes and complements, income, expected
future prices and income, population and preferences
Supply
• Supply is the relationship between the quantity supplied of a good and its price when
all other influences on selling plans remain the same
• The higher the price of a good, other things remaining the same, the greater is the
quantity supplied – the law of supply
• Supply depends on the prices of factors of production, the prices of related goods
produced, expected future prices, the number of suppliers and technology
Market equilibrium
• At equilibrium price, the quantity demanded equals the quantity supplied
• At prices above equilibrium, there is a surplus and the price falls
• At prices below equilibrium, there is a shortage and the price rises
Document Summary
Markets and prices: a competitive market had many buyers and sellers and no one individual can influence the price, opportunity cost is a relative price, demand and supply determine relative prices. Market equilibrium: at equilibrium price, the quantity demanded equals the quantity supplied, at prices above equilibrium, there is a surplus and the price falls, at prices below equilibrium, there is a shortage and the price rises. An increase in demand and a decrease in supply bring a higher price, but the quantity might increase, decrease or remain the same. If demand is elastic, a decrease in price lease to an increase in total revenue. If demand is unit elastic, a decrease in price leaves total revenue unchanged. If demand is inelastic, a decrease in price leads to a decrease in total revenue. The cross elasticity of demand with respect to the price of a complement is negative.
