REMINDER ON A GRAPH:

 Vertical curve: inelastic

 Horizontal curve: elastic

Market= is a group of buyers and sellers of a particular good or service

 Buyers determine demand
 Sellers determine supply

Competitive market: many buyers and sellers, and each has a slight or no impact on the
market price

Market structure:
 Monopoly
 Oligopoly (few firms)
 Monopolistic competition (differentiated products)
 Perfect competition (identical products)

Shifts in the demand curve (caused by changes in exogenous variables: consumer income,
prices of related goods (complements or subsitutes, demographcis)

(Income increase: demand for a normal good increases; for an inferior good will decrease
Recession: demand for inferior good increases )

movement along the demand curve : Change in the price of a product

Shifts in supply : input prices, tech dev, natural factor (for example: new tech => supply curve
moves to the right)

Movement along the supply curve: change in the price of the product (endogenous
variable)

Excess supply => surplus

Excess demand => shortage

Increase in demand => Higher price + higher quantity sold

Price elasticity of demand: how much the quantity demanded of good/service responds to a
change in the price = %change in demand / %change in price
The demand is elastic if:
- Large number of close substitutes
- The good is a luxury (not necessity)
- Narrow market

Demand curves:
  Unit elastic (PED=1): demand changes by the same % as the price
Inelastic Demand (movement along the demand curve
 Inelastic Demand (PED<1):demand does not respond strongly to prices changes
(example: gasoline, tap water, cigarettes)
 Elastic Demand (PED>1): demand responds more strongly to price changes
(examples: Volkswagen)
 Perfect Inelastic (PED=0): demand doesn’t respond to prices changes at all
 Perfectly elastic: demand changes infinitely

Income elasticity of demand= %change in demand / %change in income

 Normal goods (most goods) demand raises with higher income
 Inferior goods (fast food) demand lowers with higher income

Cross-price elasticity of demand= %change demand good1 / %change price good2

 Positive if goods are substitutes
 Negative if goods are complements

Price elasticity of supply= %change qt supply/%change in price