Chapter 4: Demand
A demand curve relates the quantity demanded with changes in price
            Downward sloping (negative slope)
            Reflects the inverse relationship between quantity demanded and price
            Three reasons for downward slope:
1.      Diminishing marginal utility as quantity demanded rises
2.      Buying power changes as price changes (Income effect)
3.      Substitutes are purchased when prices rise (Substitution effect)
Changes in price result in movement along the demand curve (change in quantity demanded)
Changes in something other than price result in a shift in the demand curve (change in demand)
            ?$ => ?QD (movement along)           ?~$ => ?D (shift)
Factors that shift the demand curve:
·        Consumer income goes up or down
If income goes up, demand shifts to the right for normal goods
If income goes up, demand shifts to the left for inferior goods
·        Tastes and preferences change
Fads shift the demand curve to the right
·        Price of substitutes change
If the price of a substitute goes up, demand shifts to the right
If the price of a substitute goes down, demand shifts to the left
·        Price of complementary goods change
If the price of a complement goes up, demand shifts to the left
If the price of a complement goes down, demand shifts to the right
·        Expectations change
If supply of a good is expected to fall, demand curve shifts to the right now (hoarding effect)
·        Weather or season changes
During summer, demand curve for gasoline shifts to the right
During winter, demand curve for gasoline shifts to the left
·        Population changes
When population increases, demand curve shifts to the right
When population decreases, demand curve shifts to the left
Elasticity of demand indicates how responsive quantity demanded is to price changes
            Steep demand curves = inelastic demand
            Flat demand curves = elastic demand
Factors that determine elasticity:
            Elastic                                                                       Inelastic
            Many substitutes (soft drinks)                                  Few substitutes (insulin)
            Expensive (house or car)                                         Inexpensive (salt)
            Time to decide (vacation)                                        Must buy now (snake antivenom)
Revenue test for elasticity:
            If as prices go up, total revenue goes up, demand is inelastic
            If as prices go up, total revenue goes down, demand is elastic
            If as prices go up, total revenue is unchanged, demand is unit elastic

 Chapter 5: Supply
A supply curve relates the quantity supplied with changes in price
            Upward sloping (positive slope)
            Reflects the direct relationship between quantity supplied and price
            Two reasons for upward slope:
1.      Rising marginal costs
2.      Attraction of additional suppliers
Changes in price result in movement along the supply curve and changes quantity supplied
Changes in something other than price result in a shift in the supply curve and changes supply
            ?$ => ?QS (movement along)           ?~$ => ?S (shift)
Factors that shift the supply curve:
·        Input costs change (resources and materials change in price)
If input costs go down, supply shifts to the right
If input costs go up, supply shifts to the left
·        Productivity changes
      If productivity increases, unit costs decrease and supply shifts right
      If productivity decreases, unit costs increase and supply shifts left
·        Technology changes
If technology decreases unit costs, supply curve shifts right
·        Government regulation changes
If regulations increase production costs (tax), supply curve shifts left
If regulations decrease production costs (subsidy), supply curve shifts right
·        Expectations change
If price of a good is expected to rise, supply curve shifts to the left now
·        Number of sellers changes
When number of sellers increases, supply curve shifts to the right
When number of sellers decreases, supply curve shifts to the left
Elasticity of supply indicates how responsive quantity supplied is to price changes
            Steep supply curves = inelastic supply
            Flat supply curves = elastic supply
Test for supply elasticity:
If the percentage change in quantity supplied is greater than the percentage change in price, supply is elastic
If the percentage change in quantity supplied is less than the percentage change in price, supply is inelastic
If the percentage change in quantity supplied is equal to the percentage change in price, supply is unit elastic
 Factors that determine elasticity:
            Elastic                                                                       Inelastic
            Ease of entry into market                                         Barriers to entry
            Time to adjust                                                            Short time frame
Production Function relates how various amounts of input (labor) affect total output (total product)
    Stage 1: rising marginal product product (need to expand production)
    Stage 2: diminishing marginal product (should produce in this stage)
    Stage 3: falling marginal product (producing too much)
Production Costs
          Fixed Costs + Variable Costs = Total Costs
Fixed:
          Research and Development
          Plant
          Equipment
          Salaried Employees
          Borrowing
Variable:
          Production materials
          Utilities
          Hourly Wages
Law of Diminishing Returns: As variable resources are added to a fixed amount of other resources, the marginal rate of production decreases (diminishing marginal returns)
Marginal Cost: The cost of producing the next unit
Marginal Revenue: The income received from the next unit
How Much to Produce?  Produce at the rate the Marginal Revenue equals Marginal Cost

Chapter 6
Equilibrium Prices
Market prices are determined by the interaction of supply and demand
            Prices serve as rationing devices, which means they allocate scarce resources
Equilibrium is reached when quantity supplied and quantity demanded are equal
            Equilibrium Quantity is where the demand and supply curves intersect
            Equilibrium Price is where the demand and supply curves intersect
A shortage is created when the price falls below  the equilibrium price
A surplus is created when the price is above the equilibrium price
            A surplus results in increased inventories
In markets with no price controls, a shortage will lead to an increase in price and a movement along both curves until equilibrium is reached
In markets with no price controls, a surplus will lead to a decrease in price and a movement along both curves until equilibrium is reached
Price floors result in a permanent surplus. For example, the minimum wage and agricultural subsidies.
Price ceilings result in a permanent shortage. For example, rent control laws.
Changes in Equilibrium Price
Shifts in either the demand or supply curve will affect the Equilibrium Price.
Chapter 7: Market Structures
  This Chapter focuses on the four major market structures:
   1) Pure Competition
   2) Monopolistic Competition
   3) Oligopoly
   4) Monopoly
Click here for a Problem Solving Activity: Problem Four