Unit 2 Mastery: Market Mechanisms and Elasticity

Demand

The different quantities of goods that consumers are willing and able to buy at different prices.

Law of Demand

There is an inverse relationship between price and quantity demanded.

Change in Quantity Demanded

Caused only by a change in the current price of the good itself.

Change in Demand

Caused by effective non-price determinants, shifting the entire demand curve.

Determinants of Demand

Factors that can shift the demand curve, summarized by the mnemonic TRIBE.

Tastes and Preferences

One of the demand shifters; changes in consumer preferences can increase or decrease demand.

Related Goods Prices

Prices of substitutes and complements can affect demand; substitutes rise leads to increased demand for the other.

Income

Changes in consumer income can shift demand; normal goods demand increases with income, inferior goods decrease.

Buyers

More buyers in the market will increase demand.

Expectations (in Demand)

Future price expectations can lead consumers to buy more today, shifting demand up.

Supply

The different quantities of a good that sellers are willing and able to sell at different prices.

Law of Supply

There is a direct relationship between price and quantity supplied.

Change in Supply

Caused by determinants excluding current price, shifting the entire supply curve.

Determinants of Supply

Factors that can shift the supply curve, remembered by the acronym ROTTEN.

Resources

Cost of inputs that affect supply; increasing resource costs can decrease supply.

Technology

Advancements can shift supply right, enabling more efficient production.

Taxes and Subsidies

Taxes are costs that decrease supply, while subsidies lower costs and increase supply.

Equilibrium

The point where supply and demand intersect, resulting in no tendency for price change.

Shortage

Occurs when price is below equilibrium, causing quantity demanded to exceed quantity supplied.

Surplus

Occurs when price is above equilibrium, leading to a supply greater than quantity demanded.

Elasticity

Measures the sensitivity of quantity demanded or supplied in response to price changes.

Price Elasticity of Demand (PED)

Measures how much quantity demanded responds to a change in price.

Cross-Price Elasticity of Demand (XED)

Measures how sensitive the demand for one good is to the price of another good.

Income Elasticity of Demand (YED)

Measures how sensitive demand is to a change in consumer income.

Price Elasticity of Supply (PES)

Measures how sensitive producers are to changes in price.

Total Revenue Test

Analyzes the relationship between price changes and total revenue to assess demand elasticity.