2 Micro Key
The Nature and Functions of
is the relationship between the quantities of a good that consumers are
willing and able
to purchase and the various prices in a given period of
The law of demand states
that consumers buy more at lower prices and less at higher prices
all other things equal (ceteris paribus).
is a difference between a change in demand and a change in quantity
A change in quantity
demanded can only be caused by a change in the price of the good.
It is a movement along the demand
At a lower price, a greater
quantity is demanded.
A change in
demand means that more or less is demanded at every price; it is caused by
in preferences, incomes, expectations,
population, and the prices of
complementary of substitute goods.
income effect, the substitution effect, and the law of diminishing
marginal utility can explain
why a demand curve is downward sloping.
law of diminishing marginal utility states that as more of a good or
service is consumer in a
given period of time, the additional benefit or
is the relationship between price and the amount that producers are
willing and able to sell at
various prices in a given period of time. Producers are willing to sell more at
higher prices and less
at lower prices, all other things
is a difference between a change in supply and a change in quantity
A change in
supplied can only be caused by a change in the price of a good. It is a movement along the curve.
A change in supply is a shift of the
curve where more or less is supplied at every price.
Changes in technology,
production costs, taxes, subsidies and expectations will cause a shift in supply.
competitive markets, supply and demand constitutes the sum of many
individual decisions to sell and to buy.
The interaction of supply and demand determines the price and
quantity that will clear the market.
The price where quantity supplied and
quantity demanded are equal is called the
equilibrium or market-clearing price.
At a price higher than equilibrium, there is a surplus and
pressure on sellers to lower their prices.
At a price lower than equilibrium, there is a shortage and
pressure on buyers to offer higher prices.
administered maximum price is called a price ceiling. A price ceiling below the equilibrium
causes shortages. A price ceiling set at or
above the equilibrium price has no effect on the market.
- An administered
minimum price is called a price floor.
A price floor above the equilibrium price
floor set at or below the equilibrium
price has no effect on the market.
- Consumer surplus is the difference between what
consumers are willing to pay for a good or service
and the price that
consumers actually have to pay.
- Producer surplus is the difference between the price
business would be willing to accept for the goods
and services and the price
they actually receive.
elasticity of demand refers to how much the quantity demanded changes in
relation to a given
change in price.
If the percentage change in quantity demanded is greater than the
percentage change in price,
the demand for the good is considered
If the percentage change
in quantity demanded is less than
the percentage change in price, the
demand for the good is considered inelastic. If the percentage change in price
is equal to the percentage
change in quantity demanded, the demand for the good is considered unit
have a more elastic demand than necessities. High-priced goods have a more elastic demand
Goods that are
habit-forming tend to have an inelastic demand. Demand is more
elastic in the long run than in the short
of demand can be determined by using the total revenue and arc methods.
elasticity of supply, also stated in percentage terms, refers to how
much quantity supplied
changes in relation to a given change in
Supply is more elastic in
the long run than in the short run.
market economy, prices provide information, allocate resources, and act as
It is important
to know how to illustrate a wide range of situations with supply and