1.1 Competitive Markets: Demand and Supply




Market Equilibrium

The Role of Price Mechanism

Price mechanism: moves market into equilibrium.

Opportunity cost: is the next best alternative forgone. When a choice is made, there is an opportunity cost.

Market Efficiency

Producer & consumer Surplus

  1. Consumer surplus: is the extra satisfaction gained by consumers from paying a price that is lower than that which they are prepared to pay.
  2. Producer surplus: is the excess of actual earnings that a producer makes from a given quantity of output, over and above the amount the producer would be prepared to accept for that output.

Allocative efficiency happens when competitive market is in equilibrium, where resources are allocated in the most efficient way from society’s point of view.

1.2 Elasticity

Price Elasticity of Demand (PED)

Values are:

Terms used are:

Given a change in P:

PED > 1

price elastic demand

%ΔQ is larger

0 < PED < 1

price inelastic demand

%ΔQ is smaller

PED = 1

unitary price elastic demand

%ΔQ is equal

PED → ∞

infinitely price elastic demand

%ΔQ is infinite

PED = 0

perfectly price inelastic demand

%ΔQ is zero

Cross Price Elasticity of Demand (XED)

Income Elasticity of Demand (YED)

Price Elasticity of Supply (PES)

Values are:

Terms used are:

Given a change in P:

PES > 1

price elastic supply

%ΔQ is larger

0 < PES < 1

price inelastic supply

%ΔQ is smaller

PES = 1

unitary price elastic supply

%ΔQ is equal

PED → ∞

infinitely price elastic supply

%ΔQ is infinite

PES = 0

perfectly price inelastic supply

%ΔQ is zero

1.3 Government Intervention

Indirect Taxes



Price Controls

1.4 Market Failure

The Meaning of Market Failure

Types of Market Failure

(Explain, using examples, that government responses to threats to sustainability are limited by the global nature of the problems and the lack of ownership of common access resources, and that effective responses require international cooperation)