1. UNIT II Markets and Prices

2. Law of Demand Consumers buy more of a good when its price decreases and less when its price increases

3. Inverse or Indirect Relationship As Price goes Down…...……….Quantity Demanded goes Up As Price goes Up……..... …Quantity Demanded goes Down

4. Elasticity of Demand “Measure of how consumers react to a price change” Elastic Demand – Demand that is very sensitive to a change in price Inelastic Demand – Demand that is not very sensitive to a change in price

5. Factors Affecting Elasticity of Demand Availability of Substitutes – More substitutes = Elastic Demand Relative Importance – Large % of budget = Elastic Demand Necessities vs. Luxuries – Necessities = Inelastic; Luxuries = Elastic Change over Time – More time to adjust = Elastic

6. Law of Supply Sellers sell more of a good when its price increases and less when its price decreases

7. Direct Relationship As Price goes Down…...……….Quantity Supplied goes Down As Price goes Up……..... …Quantity Supplied goes Up

8. Elasticity of Supply “Measure of the way Quantity Supplied reacts to a change in price” Elastic Supply – Supply that is very sensitive to a change in price Inelastic Supply – Supply that is not very sensitive to a change in price

9. Factors Affecting Elasticity of Supply Cost of Producing Additional Units – High Cost = Inelastic Supply Time – More Time = Elastic Supply

16. Factors that Shift Demand Substitute Goods – Price of substitute good increases; Demand for other good increases – Price of substitute good decreases; Demand for other good decreases Population – Increase in population; Demand for goods desired by population increases – Decrease in population; Demand for goods desired by population decreases

17. Advertising – Successful advertising campaign; Demand increase for that good – Unsuccessful advertising campaign; Demand decreases for that good Complementary Goods – Price of complementary good increases; Demand for other good decreases – Price of complementary good decreases; Demand for other good increases

18. Expectations – Consumer expectation of a price decrease in the future for a good; Demand for that good “NOW” decreases – Consumer expectation of a price increase in the future for a good; Demand for that good “NOW” increases

19. Income – Normal Goods Income rises; Demand for normal goods increases Income falls; Demand for normal goods decreases – Inferior Goods Income rises; Demand for inferior goods decreases Income falls; Demand for normal goods increase Tastes – Increased preference for a good; Demand increases – Decreased preference for a good; Demand decreases

22. Factors That Shift Supply Technology – Advances in technology for a good; Supply increases – Decreases in technology for a good; Supply decreases Regulations – Increases in Gov’t regulations on production of a good; Supply decreases – Decreases in Gov’t regulations on the production of a good; Supply increases

23. Input Costs – Increase in input costs for a good; Decrease in Supply – Decrease in input costs for a good; Increase in Supply Subsidies – Increase in the subsidies for the production of a good; Supply increases – Decrease in the subsidies for the production of a good; Supply decreases

24. Taxes – Increase in the taxes on the production of a good; Supply decreases – Decrease in the taxes on the production of a good; Supply increases Expectations – Sellers expect a higher price in the future for their good; Supply “NOW” decreases – Sellers expect a lower price in the future for their good; Supply “NOW” increases

25. Number of Suppliers – Increase in the number of suppliers for a good; Supply increases – Decrease in the number of suppliers for a good; Supply decreases