Market

The market has the following characteristics:

  • Private property: Most goods and services are privately owned
  • Freedom of choice: Owners are free to produce, sell, buy goods and services in a competitive market
  • Motive of self-interest: Both consumers and producers pursue their self-interest
  • Competition: Demand and supply determine prices. The more the demand increases, the more the prices increase (law of demand)
  • Limited government: The government ensures that the markets are stable, fair, open, working, and safe

Demand

Demand depends on:

  • Product price
  • Prices of related goods
  • Consumer income
  • Consumer tastes

The demand curve:

It is a curve that shows the relationship between price and quantity demanded by consumers. As the price of a good decreases the quantity of demands increases.

Shifting demand curve and type of good:

  • Substitute or alternative good: good that can be used in place of another
  • Inferior good: good that becomes less desirable as consumer income rises
  • Normal good: good that becomes more desirable as consumer income rises

 

Supply

Supply depends on:

  • Price of a good
  • Prices of other goods
  • Cost of production
  • Technical progress
  • Governments’ policies: government taxes and subsidies
  • Transportation condition
  • Goal of the firm
  • Expectation about the future regarding price

 

The supply curve:

It is a curve that shows the relationship between price and quantity supplied by producers.

As the price of a good increases the quantity of supplies increases. In other words, when prices rise, producers increase supply.

Economic Profits:

Profit = Total revenue – Total cost

Economic profit = Total revenue – Opportunity cost

Accounting profit = Total revenue – Explicit cost