Microeconomics
Understand how consumers and firms make decisions, how markets work, and how prices are determined through supply and demand.
Supply and Demand
Demand
Represents the quantity of a good or service that consumers are willing and able to purchase at different price levels
Law of Demand
When the price of a good increases, the quantity demanded decreases (and vice versa), assuming other factors remain constant.
Factors Affecting Demand
- Consumer income
- Prices of related goods
- Consumer preferences
- Expectations about the future
- Number of consumers
Supply
Represents the quantity of a good or service that producers are willing to offer at different price levels.
Law of Supply
When the price of a good increases, the quantity supplied increases (and vice versa), as it becomes more profitable to produce.
Factors Affecting Supply
- Production costs
- Technology
- Number of sellers
- Expectations about prices
- Government policies
Market Equilibrium
Market equilibrium occurs when the quantity demanded equals the quantity supplied. At this point, the equilibrium price and quantity are determined.
What Happens When There’s No Equilibrium?
Surplus (Excess Supply)
When price is above equilibrium, quantity supplied exceeds quantity demanded. Sellers reduce prices to sell excess inventory.
Shortage (Excess Demand)
When price is below equilibrium, quantity demanded exceeds quantity supplied. Competition among buyers drives prices up.
Price Elasticity
Elasticity measures how sensitive quantity demanded or supplied is to changes in price. This concept is crucial for business and policy decisions.
Elastic
Large variation in quantity for small price change
Example: Luxury goods, non-essentials
Inelastic
Small variation in quantity despite price change
Example: Medicine, basic necessities
Unit Elastic
Proportional variation between price and quantity
Example: Some consumer goods
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