Microeconomics
1. Supply and Demand
A. Law of Demand
● Definition: Inverse relationship between price and quantity demanded (ceteris paribus).
1. As price decreases, demand increases.
2. Demand curve slopes downward.
● Key Factors Influencing Demand:
1. Income (normal vs. inferior goods).
2. Price of substitutes/complements.
3. Consumer preferences.
4. Expectations of future prices.
5. Population demographics.
B. Law of Supply
● Definition: Direct relationship between price and quantity supplied (ceteris paribus).
1. As price increases, supply increases.
2. Supply curve slopes upward.
● Key Determinants of Supply:
1. Input prices (labor, raw materials).
2. Technology advancements.
3. Taxes and subsidies.
4. Number of suppliers.
5. Expectations of future prices.
C. Market Equilibrium
● Equilibrium Price (P*): Price at which quantity supplied equals quantity demanded.
● Shifts in Curves:
○ Demand Increase: Higher equilibrium price and quantity.
○ Supply Increase: Lower equilibrium price, higher quantity.
D. Elasticity
1. Price Elasticity of Demand (PED):
○ Formula: PED=%ΔQd%ΔPPED = \frac{\% \Delta Q_d}{\% \Delta P}PED=%ΔP%ΔQd
○ Elastic if PED > 1, inelastic if PED < 1.
○ Determinants: Availability of substitutes, necessity vs. luxury, time horizon.
2. Price Elasticity of Supply (PES):
○ Formula: PES=%ΔQs%ΔPPES = \frac{\% \Delta Q_s}{\% \Delta P}PES=%ΔP%ΔQs
○ Influenced by production flexibility and time.
1. Supply and Demand
A. Law of Demand
● Definition: Inverse relationship between price and quantity demanded (ceteris paribus).
1. As price decreases, demand increases.
2. Demand curve slopes downward.
● Key Factors Influencing Demand:
1. Income (normal vs. inferior goods).
2. Price of substitutes/complements.
3. Consumer preferences.
4. Expectations of future prices.
5. Population demographics.
B. Law of Supply
● Definition: Direct relationship between price and quantity supplied (ceteris paribus).
1. As price increases, supply increases.
2. Supply curve slopes upward.
● Key Determinants of Supply:
1. Input prices (labor, raw materials).
2. Technology advancements.
3. Taxes and subsidies.
4. Number of suppliers.
5. Expectations of future prices.
C. Market Equilibrium
● Equilibrium Price (P*): Price at which quantity supplied equals quantity demanded.
● Shifts in Curves:
○ Demand Increase: Higher equilibrium price and quantity.
○ Supply Increase: Lower equilibrium price, higher quantity.
D. Elasticity
1. Price Elasticity of Demand (PED):
○ Formula: PED=%ΔQd%ΔPPED = \frac{\% \Delta Q_d}{\% \Delta P}PED=%ΔP%ΔQd
○ Elastic if PED > 1, inelastic if PED < 1.
○ Determinants: Availability of substitutes, necessity vs. luxury, time horizon.
2. Price Elasticity of Supply (PES):
○ Formula: PES=%ΔQs%ΔPPES = \frac{\% \Delta Q_s}{\% \Delta P}PES=%ΔP%ΔQs
○ Influenced by production flexibility and time.
