Unit 2 Micro Key Ideas 

Unit 2:   The Nature and Functions of Product Markets

• Demand 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 time. 
   
• The law of demand states that consumers buy more at lower prices and less at higher prices
  all other things equal (ceteris paribus). 
  
• There is a difference between a change in demand and a change in quantity demanded. 
  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 curve.  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 changes
  in preferences, incomes, expectations,  population, and the prices of complementary of substitute goods.
  
• The income effect, the substitution effect, and the law of diminishing marginal utility can explain
  why a demand curve is downward sloping.
  
  
• The 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 satisfaction declines.
  
  
• Supply 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 equal.
  
• There is a difference between a change in supply and a change in quantity supplied.  A change in
  quantity 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.
  
  
• In 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.
  
  
• An administered maximum price is called a price ceiling.  A price ceiling below the equilibrium price
  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
  causes surpluses.  A 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.
   
• Price 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 elastic.  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 elastic.
  
• Luxuries have a more elastic demand than necessities.  High-priced goods have a more elastic demand
  than low-priced goods.  Goods that are habit-forming tend to have an inelastic demand.  Demand is more
  elastic in the long run than in the short run.
  
• Price elasticity of demand can be determined by using the total revenue and arc methods.
  
• Price elasticity of supply, also stated in percentage terms, refers to how much quantity supplied
  changes in relation to a given change in price.  Supply is more elastic in the long run than in the short run.
  
• In a market economy, prices provide information, allocate resources, and act as rationing devices. 
  It is important to know how to illustrate a wide range of situations with supply and demand graphs.