Markets, Elasticities and Market Structures Notes

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APUNTES PRINCIPLES OF ECONOMICS Bachelor's Degree in International Relations Ramon Llull University AprenAI 2026-2027 Complete summary of supply, demand curves, elasticities, competitive equilibrium, monopoly deadweight loss, and imperfect competition market structures.

APREN.AI Contents 1 Demand and Supply Fundamentals The Concept of Demand The Concept of Supply 2 Elasticities of Demand and Supply Foundations of Elasticity Price Elasticity of Demand Cross-Price and Income Elasticities Price Elasticity of Supply 3 Equilibrium, Disequilibrium, and Market Structures Market Equilibrium Disequilibrium: Surpluses and Shortages Imperfect Competition and Market Structures Welfare and Efficiency Losses in Monopolies 4 Review Summary Demand and Supply Fundamentals Elasticities of Demand and Supply Market Structures and Welfare Answers to the review questions These notes may contain errors or omissions.

They are study support and do not replace the official syllabus or your teachers: check important information. Markets, Elasticities and Market Structures Notes 1 1 Demand and Supply Fundamentals BY THE END YOU WILL BE ABLE TO Distinguish between curve movements and curve shifts. Formulate linear demand and supply equations from given data. THINK BEFORE YOU READ 1 Does a price drop cause customers to demand more, or does it shift the overall demand schedule? The Concept of Demand The demand curve displays how many units of a good consumers plan to purchase across alternative price levels.

An inverse or negative relationship links price and quantity demanded because of decreasing marginal utility. As the price rises, buyers acquire fewer units. Algebraically, a linear demand schedule follows the general expression . In the introductory example, this relation is specified by the equation . Price ( ) Quantity Demanded ( ) 10 10 6 20 2 30 A variation in the good's own price causes a movement along the curve. In contrast, when the quantity demanded alterations occur at every given price, the entire demand curve shifts outward or inward.

DEFINITION A demand shift represents an alteration in the total volume purchasers are willing to buy at each specific price, triggered by external determinants. The core external factors driving demand curve shifts include: Prices of related goods or services (substitutes and complements) Consumer income levels Consumer tastes and preferences Buyer expectations Total number of consumers in the marketplace Q = d a bP Q = d 35 2,5P P Q d Markets, Elasticities and Market Structures Notes 2 CHECK 2 Why does the demand curve have a negative slope? The Concept of Supply The supply schedule describes the aggregate amount of a commodity sellers are willing to put on sale across varied price points.

It reveals a positive relationship between price and quantity supplied, driven by increasing marginal production costs. A standard linear supply curve follows . For instance, the original numerical schedule corresponds to the line . Price ( ) Quantity Supplied ( ) 10 30 6 20 2 10 Shifts of the entire supply schedule transpire whenever production circumstances change independent of the market output price. Gráfica de inward and outward shifts of the market supply curve.

Five primary drivers produce outward or inward supply shifts: Changes in input prices (production costs) Prices of related goods or services Technological advancements Producer expectations regarding future market conditions Q = s a + bP Q = s 5 + 2,5P P Q s Markets, Elasticities and Market Structures Notes 3 The aggregate number of producers operating in the sector COMMON MISTAKE Do not confuse a shift of a curve with a movement along the curve. A change in the good's own price only causes a movement along the existing line, whereas shifts occur strictly due to non- price factors such as input costs, consumer income, or technology.

OUTLINE Curve Shift Determinants KEY IDEAS Demand shows a negative slope due to diminishing marginal utility. Supply demonstrates an upward slope arising from increasing marginal costs. Own-price alterations cause movements along existing curves, while non-price determinants shift the curves. CHECK YOUR UNDERSTANDING 3. What happens to the supply curve if production technology improves? 4. Which algebraic formula represents linear market demand?

Demand Determinants Shifts demand curve Income and Tastes Consumer preferences and budget Related Goods and Expectations Substitutes, complements, forecasts Supply Determinants Shifts supply curve Input Costs and Technology Direct production expenses Producer Numbers and Expectations Competitor scale and future views Markets, Elasticities and Market Structures Notes 4 Quiz Circle the correct answer. The answers are at the end. 5. What underlying factor explains the downward slope of the demand curve? 6. Which of these factors will cause the supply curve to shift inwards? 7. A change exclusively in the good's own price generates: 8.

In the supply formula Qs = 5 + 2.5P, what quantity is supplied at price P = 6? 2 Elasticities of Demand and Supply BY THE END YOU WILL BE ABLE TO Calculate price, cross-price, and income elasticities using numerical variations. Categorize products as substitutes, complements, normal, or inferior from elasticity metrics. THINK BEFORE YOU READ 9 Can elasticity be negative, and why do we omit the minus sign for own-price demand elasticity? Foundations of Elasticity Elasticity measures how much a variable changes when another variable experiences a change. In microeconomics, four distinct elasticities quantify responsiveness.

Price Elasticity of Demand The price elasticity of demand measures the percentage response in quantity demanded resulting from a percentage variation in price: Technological enhancements a) Increasing marginal costs b) Decreasing marginal utility c) Rising production factor costs d) A drop in output price a) An increase in input prices b) An improvement in technology c) An increase in producer count d) An outward shift of supply a) A parallel shift of both b) A movement along the curve c) An inward shift of demand d) 10 a) 25 b) 30 c) 20 d) d d Markets, Elasticities and Market Structures Notes 5 Because demand slopes downward, the absolute value is evaluated.

The responsiveness falls into specific ranges: : Perfectly elastic demand (horizontal line). : Perfectly inelastic demand (vertical line; quantity stays identical as price fluctuates). : Elastic demand (quantity changes drastically relative to price). : Inelastic demand (quantity responds marginally to price shifts). EXAMPLE Consider a price decline from to , with demand moving from to . Computing the absolute ratio: Since , this represents inelastic demand. CHECK 10 How does perfectly inelastic demand appear graphically on a standard P-Q axis?

Cross-Price and Income Elasticities The cross-price elasticity of demand tracks changes in the demand of product A in response to price shifts in product B: indicates substitute goods. indicates independent goods. indicates complement goods. For example, if the price of good B decreases from 12 to 6, and demand for good A drops from 21 to 14, the calculated value is , confirming they are substitutes. The income elasticity tracks demand shifts relative to consumer income ( ): defines a normal good. defines an inferior good.

ε = p d p 1 p p 2 1 q 1 d q q 2 d 1 d ε = p d ε = p d 0 ε p d 1 ε < p d 1 P = 1 6,25 P = 2 4,25 Q = 1 83 Q = 2 105 = 0,8 = 0,8 (4,25 6,25)/6,25 (105 83)/83 0,8 < 1 ε = A,B d p 1 B p p 2 B 1 B q 1 A q q 2 A 1 A ε > A,B d 0 ε = A,B d 0 ε < A,B d 0 ((14 21)/21)/((6 12)/12) = 0,67 > 0 I ε = I I 1 I I 2 1 q 1 d q q 2 d 1 d ε > I 0 ε < I 0 Markets, Elasticities and Market Structures Notes 6 If income rises from 1000 to 1500 while quantity demanded falls from 20 to 12, the elasticity is , identifying an inferior product. Price Elasticity of Supply The price elasticity of supply measures seller responsiveness: Gráfica de price elasticity of supply showing perfectly inelastic and inelastic cases.

When price moves from 2 to 5 and supply expands from 15 to 30, the elasticity equals , denoting inelastic supply. COMMON MISTAKE Do not apply absolute values to cross-price or income elasticity calculations! The negative or positive algebraic sign is essential: negative cross-price denotes complements, and negative income elasticity designates inferior goods. ((12 20)/20)/((1500 1000)/1000) = 0,8 < 0 ε = p s p 1 p p 2 1 q 1 s q q 2 s 1 s ((30 15)/15)/((5 2)/2) = 1/1,5 = 0,67 Markets, Elasticities and Market Structures Notes 7 OUTLINE Classification of Elasticities KEY IDEAS Price elasticity of demand classifies sensitivity as elastic (>1), inelastic (<1), or perfectly inelastic (0).

Cross-price elasticity distinguishes substitute goods (>0) from complementary goods (<0). Income elasticity identifies normal products (>0) and inferior goods (<0). CHECK YOUR UNDERSTANDING 11. What type of good yields an income elasticity of -0,8? 12. What is indicated by a cross-price elasticity of +0,67? Quiz Circle the correct answer. The answers are at the end. 13. A cross-price elasticity below zero classifies the goods as: 14. When demand price elasticity equals zero, the demand curve is: 15.

If price rises 50% and quantity demanded drops 20%, demand is: Price Elasticity Own price sensitivity Elastic vs Inelastic Values above or below 1 Cross-Price Elasticity Related product interaction Substitutes or Complements Positive or negative signs Income Elasticity Purchasing power shifts Normal vs Inferior Positive or negative signs Inferior a) Independent b) Complements c) Substitutes d) Completely horizontal a) Unitary b) Upward sloping c) Completely vertical d) Inelastic a) Unitary b) Elastic c) Infinite d) Markets, Elasticities and Market Structures Notes 8 16.

A normal good is strictly identified by having: 3 Equilibrium, Disequilibrium, and Market Structures BY THE END YOU WILL BE ABLE TO Contrast competitive market equilibrium with monopoly welfare outcomes. Categorize market structures according to the number of buyers and suppliers. THINK BEFORE YOU READ 17 What happens to total economic welfare when a competitive market turns into a monopoly? Market Equilibrium Markets serve as the space where exchanges occur, built upon individual rationality.

In perfect competition, markets feature five defining traits: Many buyers and sellers Homogenous products Free entry and exit No state intervention Perfect information The market equilibrium is located where supply and demand curves intersect. At this equilibrium price ( ), quantity supplied precisely matches quantity demanded ( ). Income elasticity above zero a) Price elasticity above one b) Income elasticity below zero c) Price elasticity equal to zero d) EP EQ Markets, Elasticities and Market Structures Notes 9 Gráfica de equilibrium point where demand intersects supply.

Disequilibrium: Surpluses and Shortages Disequilibrium emerges whenever market pricing drifts away from equilibrium: Excess supply (surplus): Set at price , where output offered exceeds purchases desired. Excess demand (shortage): Set at price , where consumer demand surpasses producer output. P > 1 EP P < 2 EP Markets, Elasticities and Market Structures Notes 10 Gráfica de market disequilibrium displaying excess supply and demand areas. CHECK 18 What occurs in a free competitive market when price is set above equilibrium?

Imperfect Competition and Market Structures Perfect competition assumptions often break down due to entry barriers, differentiated non- homogenous goods, required state intervention, imperfect information, and strategic interactions explored in game theory or uncertainty economics.

Depending on participant counts, market structures are classified systematically: Suppliers \ Buyers One buyer A few buyers Many buyers One supplier Bilateral Monopoly — Monopoly A few suppliers — — Oligopoly Many suppliers Monopsony Oligopsony Competition Welfare and Efficiency Losses in Monopolies Under competitive markets, total social welfare is maximized: Consumer Surplus equals area , while Producer Surplus spans area . a + b + c d + e Markets, Elasticities and Market Structures Notes 11 Gráfica de surplus comparison and efficiency losses in monopoly. When a monopolist captures market power, price rises to and output contracts to : Consumer Surplus shrinks to area .

Producer Surplus shifts to area . Efficiency losses (deadweight loss) equal area . Market power restricts quantity, transferring consumer surplus to the producer and creating deadweight loss where societal efficiency is lost. COMMON MISTAKE Do not confuse a monopoly (one seller, many buyers) with a monopsony (many sellers, one single buyer). Note also that the deadweight loss area (c + e) in a monopoly is lost entirely by society, not gained by the monopolist.

CAUSES AND CONSEQUENCES Entry Barriers Prevents competition from entering Monopolization of a Market Price Elevation Market price increases to Pm Output Contraction Quantity drops from Qc to Qm Deadweight Loss Efficiency loss in area c + e P m Q m a b + d c + e Markets, Elasticities and Market Structures Notes 12 KEY IDEAS Equilibrium occurs where quantity supplied matches quantity demanded without shortages or surpluses. Prices above equilibrium create excess supply, whereas lower prices produce shortages. Monopolies extract consumer surplus and generate an efficiency deadweight loss equal to area c + e. CHECK YOUR UNDERSTANDING 19.

What market structure has many sellers but only a single buyer? 20. Which specific area represents net efficiency loss under monopoly pricing? Quiz Circle the correct answer. The answers are at the end. 21. Which market condition features a single seller and a single buyer? 22. When a market experiences excess demand, current market price is: 23. In a monopoly, the deadweight welfare loss area corresponds to: 24. Which condition is NOT a requirement for perfect competition? 4 Review Summary Demand and Supply Fundamentals Concept Definition Demand schedule Negative relationship between price and quantity demanded ( ) driven by decreasing marginal utility.

Bilateral Monopoly a) Monopsony b) Oligopoly c) Oligopsony d) At infinite elasticity a) Equal to equilibrium b) Above equilibrium price c) Below equilibrium price d) d + e a) a + b b) c + e c) b + d d) No state intervention a) Homogenous products b) Perfect information c) Barriers to entry d) Q = d a bP Markets, Elasticities and Market Structures Notes 13 Concept Definition Supply schedule Positive relationship between price and quantity supplied ( ) driven by increasing marginal production costs. Demand shift Change in quantities demanded at every price level caused by changes in income, tastes, expectations, number of buyers, or related goods prices.

Supply shift Change in quantities supplied at every price level caused by changes in input prices, technology, expectations, number of producers, or related goods prices. Elasticities of Demand and Supply Concept Definition Price elasticity of demand ( ) Absolute percentage change in quantity demanded relative to price variation, classifying goods as elastic ( ), inelastic ( ), perfectly inelastic (0), or perfectly elastic ( ). Cross-price elasticity ( ) Percentage change in demand for good A over percentage change in price of good B, identifying substitutes ( ) and complements ( ).

Income elasticity ( ) Percentage change in demand relative to consumer income variation, distinguishing normal goods ( ) from inferior goods ( ). Price elasticity of supply ( ) Percentage change in quantity supplied relative to price variation, indicating supplier responsiveness. Market Structures and Welfare Concept Definition Market equilibrium Intersection of supply and demand curves where quantity supplied equals quantity demanded at the market clearing price. Disequilibrium Market condition producing excess supply (surplus when price is above equilibrium) or excess demand (shortage when price is below equilibrium).

Perfect competition Market structure characterized by many buyers and sellers, homogeneous products, free entry and exit, perfect information, and no state intervention. Imperfect market structures Market configurations categorized by participant counts, including monopoly, monopsony, oligopoly, oligopsony, and bilateral monopoly. Monopoly efficiency loss Societal deadweight loss represented by area due to output restriction below competitive levels. Q = s a + bP ε p d 1 < 1 ε A,B d > 0 < 0 εI > 0 < 0 ε p s c + e Markets, Elasticities and Market Structures Notes 14 Answers to the review questions 1.

It causes a movement along the demand curve toward a higher quantity demanded, without shifting the curve itself. 2. It reflects the inverse relationship between price and quantity caused by diminishing marginal utility, meaning additional units provide progressively less satisfaction. 3. The supply curve shifts outwards (to the right) because producers can offer more output at every given price. 4. It is denoted as , where illustrates the inverse price-quantity response. 5. c) Decreasing marginal utility. Decreasing marginal utility causes each extra unit consumed to provide less value, reducing buyer price willingness. 6. b) An increase in input prices.

Higher input prices elevate production costs, shifting the supply curve inwards at every price. 7. c) A movement along the curve. Own-price modifications adjust the specific quantity demanded or supplied along the static curve. 8. d) 20. Plugging P = 6 yields Qs = 5 + 2.5(6) = 5 + 15 = 20. 9. Price elasticity of demand is naturally negative due to the law of demand, so absolute values are used for simplicity, but signs are retained for cross-price and income elasticities. 10. It is depicted as an upright, vertical line where quantity is constant at all prices. 11. It is an inferior good because demand contracts as buyer income grows. 12.

A positive value proves that the two commodities are substitute goods. 13. c) Complements. A negative cross-price elasticity defines complementary goods consumed together. 14. d) Completely vertical. A zero elasticity value corresponds to a vertical, perfectly inelastic demand line. 15. a) Inelastic. The elasticity ratio is "-0.20 / 0.50" = 0.4, which is less than 1 (inelastic). 16. a) Income elasticity above zero. Normal goods exhibit a positive demand reaction when income rises (elasticity > 0). 17. Consumer surplus decreases, producer surplus captures part of it, and a deadweight efficiency loss arises. 18.

An excess supply or surplus is created because suppliers produce more than buyers wish to purchase. 19. A monopsony structure possesses many suppliers and one buyer. 20. Area represents the deadweight loss created by output reduction. 21. a) Bilateral Monopoly. A bilateral monopoly uniquely pairs one single supplier against one single buyer. 22. d) Below equilibrium price. Prices below equilibrium spark higher demand than producers supply, creating shortages. 23. c) c + e. Areas c and e represent the deadweight efficiency loss sacrificed due to output restriction. 24. d) Barriers to entry. Perfect competition mandates entirely free entry and exit, meaning no barriers exist.

Q = d a bP b c + e Markets, Elasticities and Market Structures Notes 15