THE MARKET

• MARKET EQUILIBRIUM=A STATE OF EQUALITY BETWEEN DEMAND AND SUPPLY.
• DEMAND= QUANTITY OF PRODUCTS THAT CONSUMERS ARE WILLING TO PURCHASE.
• SUPPLY=THE QUANTITY OF A PRODUCT THAT PRODUCERS ARE WILLING TO SUPPLY.

HOW PRICE IS SET

• FACTOR 1: DEMAND- IF DEMAND IS HIGH THEN PRICE WILL BE SET FAIRLY HIGH, HOWEVER IF DEMAND IS LOW PRICE WILL BE SET REASONABLY LOW. DEMAND CAN BE AFFECTED BY PRICE, INCOME, WEALTH ETC.
• FACTOR 2: SUPPLY- SUPPLY SEEKS TO SATISFY THE WANTS OF CONSUMERS, BUT MAY TAKE INTO ACCOUNT GOOD WILL, SO PRODUCERS WILL PUT THE PRODUCT AT A FAIR PRICE TO START WITH, HOWEVER IF SUPPLY OF THE GOOD OR SERVICE IS LOW THEY MAY HAVE TO SET IT AT A HIGHER PRICE, MOST NEW BUSINESSES WILL DO THIS.

Elasticity

• PED (price elasticity of demand) %change in QD/%change in price.
• YED (price elasticity of income) %change in QD/%change in income.
• Elasticity is the measurement of how responsive an economic variable is to a change in another.
• luxury good- is a good for which demand increases more than proportionally as income rises. This is in contrast to a necessity good for which demand increases proportionally less than income.

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