Key points
There is a four-step process that allows us to predict how an event will affect the equilibrium price and quantity using the supply and demand framework.
Step one: draw a market model (a supply curve and a demand curve) representing the situation before the economic event took place.
Step two: determine whether the economic event being analyzed affects demand...
Key points
Command-and-control regulation sets specific limits for pollution emissions and/or mandates that specific pollution-control technologies that must be used.
Although such regulations have helped to protect the environment, they have three shortcomings: they provide no incentive for going beyond the limits they set; they offer limited flexibility on where and...
Key points
The budget constraint is the boundary of the opportunity set—all possible combinations of consumption that someone can afford given the prices of goods and the individual’s income.
Opportunity cost measures cost in terms of what must be given up in exchange.
Marginal analysis is the process of comparing the benefits...
In a competitive market, demand for and supply of a good or service determine the equilibrium price.
The law of demand
Markets have two agents: buyers and sellers. Demand represents the buyers in a market. Demand is a description of all quantities of a good or service that a buyer would be willing to purchase at all prices.
According to the law of demand, this relationship...
Key points
Long-run equilibrium in perfectly competitive markets meets two important conditions: allocative efficiency and productive efficiency.
These two conditions have important implications. First, resources are allocated to their best alternative use. Second, they provide the maximum satisfaction attainable by society.
Efficiency in perfectly...
Key points
In the market for goods and services, quantity supplied and quantity demanded are often relatively slow to react to changes in price in the short run, but they react more substantially in the long run.
As a result, demand and supply often—but not always—tend to be relatively inelastic in the short run and relatively elastic in the long run....
Key points
As a perfectly competitive firm produces a greater quantity of output, its total revenue steadily increases at a constant rate determined by the given market price.
Profits will be highest—or losses will be smallest—for a perfectly competitive firm at the quantity of output where total revenues exceed total costs by the greatest amount, or where total...
Key points
The law of demand states that a higher price leads to a lower quantity demanded and that a lower price leads to a higher quantity demanded.
Demand curves and demand schedules are tools used to summarize the relationship between quantity demanded and price.
Demand for goods and services
Economists use the term demand to...
Key points
The law of supply states that a higher price leads to a higher quantity supplied and that a lower price leads to a lower quantity supplied.
Supply curves and supply schedules are tools used to summarize the relationship between supply and price.
Supply of goods and services
When economists talk about supply, they mean the amount of some good...
Key points
Supply and demand curves intersect at the equilibrium price. This is the price at which we would predict the market will operate.
Where demand and supply intersect
Because the graphs for demand and supply curves both have price on the vertical axis and quantity on the horizontal axis, the demand curve and supply curve for a particular good or service can...
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