Chapter 4 The market forces of supply and demand
1.Markets and Competition (Section 4-1. pp. 66-67)
Market: a group of buyer and sellers of a particular good or service
Competitive market: a market in which there are many buyers and many sellers so that each has a
negligible impact on the market price
What is market? -Market is group of buyer and sellers of a particular good or service.
What are the characteristics of a perfectly competitive market?
• The goods offered for sale are all exactly the same.
• The buyers and sellers are so numerous that no single buyer or seller has any influence over the
2.Demand (Section 4-2, pp. 67-73)
Quantity demanded: the amount of a good that buyers are willing and able to purchase
Law of demand: other thing equal, when the price of a good rises, the quantity demanded of the good
falls; when the price falls, the quantity demanded rises.
Demand curve: a graph of the relationship between the price of a good and the quantity demanded
Market demand: the sum of all the individual demands for a particular good or service.
λ (Key factors for the shifting of demand curve) Demand----------T.R.I.B.E.S
λ Taste (Consumer): Depends on consumer’s taste and preference for buying specific product.
λ Prices of related goods: Substitutes: two goods for which an increase in the price of one leads
to an increase in the demand for the other. Complements: two goods for which an increase in the
price of one leads to a decrease in the demand for the other.
λ Income: Normal good: a good for which, other things equal, an increase in income leads to an
increase in demand. Inferior good: a good for which, other things equal, an increase in income
leads to a decrease in demand.
Y ↑, D_normal good ↑ Y ↓, D_inferrior good ↑
λ Number of buyers: # buyer ↑, D ↑ # buyer ↓ , D ↓
λ Expectation: Y ↑, D ↑ Y ↓, D ↓ P↑ (later), D ↑ (now) P↓(later), D ↓(now)
λ Season: Demand of the product would depend on the 4 seasons also.
3. Supply (Section 4-3, pp. 73-76)
Quantity supplied: the amount of a good that sellers are willing and able to sell
Law of supply: the claim that, other things equal, the quantity supplied of a good rises when the price of
the good rises
Supply schedule: a table that shows the relationship between the price of a good and the quantity
Supply curve: a graph of the relationship between the price of a good and the quantity supplied.
λ (Key factors for the shifting of supply curve) Supply--- R. O. T. T. E. N.
λ Resource price (input price): P↑ , S ↓ P↓ , S ↑ 2
λ Other relative good: the Supply of one good may decrease if the price of another good increases,
causing producers to reallocate resources to produce large quantities of the more profitable good.
λ Technology: Tech ↑, S ↑ ; Tech ↓ , S ↓
λ Tax and Subsidy: (Sub ↑ , S ↑ ; Tax ↑ , S ↓) (Sub ↓ , S ↓ ; Tax ↓, S ↑)
λ Expectations: P↑ (later), S ↓(now) P↓(later), S ↑(now)
λ Number of sellers: # seller ↑, S ↑ #seller ↓, S ↓
4. Supply and Demand Together (Section 4-4, pp. 77-84)
Equilibrium: a situation in which the market price has reached the level at which quantity supplied equals
Equilibrium price: the price that balances quantity supplied and quantity demanded
Equilibrium quantity: the quantity supplied and the quantity demanded at the equilibrium price
Surplus: a situation in which quantity supplied is greater than quantity demanded
Shortage: a situation in which quantity demanded is greater that quantity supplied
Law of supply and demand: the claim that the price of any good adjusts to bring the quantity supplied
and the quantity demanded for that good into balance. 3
Chapter 5 Elasticity and its application
Elasticity: a measure of the responsiveness of quantity supplied to a change in one of its determinants
Price elasticity of demand: a measure of how much the quantity demanded of a good responds to a
change in the price of that good, computed as the percentage change in quantity demanded divided by the
percentage change in price.
Availability of Close Substitutes: Goods with close substitutes tend to have more elastic demand because it is
easier for consumers to switch from that good to others.
Necessities v.s Luxuries:Necessities tend to have inelastic demands, whereas luxuries have elastic
Definition of the market: Narrowly defined markets have more elastic demand that broadly defined
market, B/C it’s easier to find close substitutes for narrowly defined goods. Ex) Ice-cream is narrow, food
Time horizon: Goods tend to have more elastic demand over longer time horizons, such as the price of
※ Price elasticity of demand= Percentage change in quantity demanded
Percentage change in price
Mid-point method: if two points(Q , P ) and ( Q , P ): 2
Price elasticity of demand= (Q2-Q1) / [(Q2-Q1) / 2]
(P2-P1)/ [(P2-P1) /2] 4
Chapter 6 Supply, Demand and Government Policies
Price ceiling: a legal maximum on the price at which a good can be sold
Price floor: a legal minimum on the price at which a good can be sold
Tax incidence: the manner in which the burden of a tax is shared among participants in a market. 5
Chapter 7 Consumers, producers and the efficiency of market
1. Consumer & Producer Surplus (Section 7-1, pp. 136-141)
Willingness to pay: the maximum amount that a buyer will pay
for a good
Cost: the value of everything a seller must give up to producer a
Consumer surplus: the amount a buyer is willing to pay for a
good – the amount the buyer actually pays for it. (The area below
the demand curve and above the price measures the consumer
surplus in a market.)
Producer surplus: the amount a seller is paid for a good – the
seller’s cost of providing it. (The area below the price and above
the supply curve measures the producer surplus in a market.)
The area below the demand curve and above the price
measures the consumer surplus.
Increase in consumer surplus: 1. Buyers who buy (Q1) at a
higher (P1), now pay less and better off. 2. Low P brings more
buyers to the market, QD increase from (Q1) to (Q2).
Increase in producer surplus: 1. Sellers who sell (Q1) at a
lower (P1), now get more for what they sell and better off. 2.
High P brings more sellers to the market; they want to sell at a
higher price and QD increase from (Q1) to (Q2)
λ Lower price, Higher consumer surplus.
λ Higher price, Higher producer surplus.
2. Market Efficiency (Section 7-4, pp. 145-150)
Consumer surplus= Value to buyer –Amount paid by Buyers
Producer surplus=Amount received by sellers – Cost to sellers
Total Surplus= Consumer surplus + Producer surplus (Total Surplus= Value to buyers - Cost to sellers)
Efficiency: the property of a resource allocation of maximizing the total surplus received by all members
Equality: the property of distributing economic prosperity uniformly among the members of society
λ Three insights of market outcomes:
λ Free markets allocate the supply of goods to the buyers who value them most highly, as
measured by their willingness to pay.
λ Free markets allocate the demand for goods to the sellers who can produce them at the lowest
λ Free markets produce the quantity of goods that maximizes the sum of consumer and
producer surplus. （Social planner cannot raise total economic well-being by increasing or
decreasing the quantity of the good.（ 6
Chapter 8 Application: The costs of Taxation
1. The Deadweight Loss of Taxation (Section 8-1, pp. 156-160)
Atax on good causes the size of the market for the good to shrink/decrease.
The tax makes the buyers and sellers worse off and the government better off.
The change in total welfare includes the change in consumer surplus (--), the change in producer
surplus (--), and the change in tax revenue (+).
The losses to buyers and sellers from a tax exceed the
revenue raised by the government.
Deadweight loss: the fall in total surplus that results from a
market distortion, such as a tax.
Tax imposes deadweight losses, because people respond to
incentives, so the size of the market shrinks below it
Taxes cause deadweight losses because they prevent
buyers and sellers from realizing some of the gains from
Tax Revenue = Tax X Quantity
2. The Determinants of the Deadweight Loss (Section 8-2, pp. 160-163)
The determinants of the Deadweight Loss:
λ If Demand curve & the size of tax unchanged: 1. Supply curve is less elastic, the deadweight loss is
smaller. 2. Supply curve is more elastic, the deadweight loss is larger.
λ If Supply curve & the size of tax unchanged: 1. Demand curve is less elastic, the deadweight loss is
smaller. 2. Demand curve is more elastic, the deadweight loss is larger.
λ The greater the elasticities of supply and demand, the greater the deadweight loss of a tax. 7
Chapter 13 The cost of Production
1. What are costs? ( Section 13-1, pp. 260-262)
Total revenue: the amount a firm receives for the sale of its output (Quantity of output X the sell price)
Total cost: the market value of the inputs a firm used in production (Sum= explicit costs + implicit costs)
Profit: total revenue – total cost.
Opportunity cost: the cost of something is what you give up to get it.
Explicit costs: input costs that require an outlay of money by the firm
Implicit costs: input costs that do not require an outlay of money by the firm
Economists study how firms make production and pricing decisions (include both E.C. and I.C.).
Accountants keep track of the money that flows into and out of firms (ignore I.C.)
An important implicit cost of almost every business is the opportunity cost of the financial capital that
has been invested in the business.
Economic profit: total revenue – total cost, including explicit and implicit costs.
Accounting profit: total revenue – total explicit cost.
The firms make positive economic profit will stay in the business. The revenue can cover all the
opportunity costs and has some revenue left to reward the firm owners.
Economic profit is smaller than the accounting profit.
2. Production and costs (Section 13-2, pp. 263-265)
Production function: the relationship
Between quantities of inputs used to make
a good and the quantity of output of that
According to Figure(b), the total-cost