Changes in consumer income (normal, inferior goods) 

Changes in the distribution of income 

Changes in tastes and preferences

Changes in the price of other goods (complement and substitute goods) 

Size of the market (number of consumers) 

Expectations 

Changes in input prices (wages or raw material prices)

Technology (lower costs of production)

Productivity (output per unit of input, more experienced, better trained workers) 

Government Policy (subsidies)

Size of market 

Expectations (if suppliers expect higher prices) 

Price Elasticity of Demand (PED)

the responsiveness of quantity demanded to a change in price

Measured by dividing the percentage change in quantity demanded by the percentage change in price 

Demand is elastic when PED>1      Demand is inelastic when 0<PED<1

   Demand is unit elastic when PED=1       Demand is perfectly inelastic when PED=0

Useful as it;

permits a firm to predict the direction of change of its total revenues given a price change 

permits government to predict the size of the necessary tax required to decrease consumption of a demerit good 

Determinants of Price Elasticity of Demand 

• The number and closeness of available substitutes (the more the substitutes the greater PED)
• The proportion of income spent on the good (the higher the proportion of income the greater PED)
• The time period involved (longer time period, greater PED)
• The nature of good (addiction)

Income Elasticity of Demand (YED)

The responsiveness of demand when consumer income changes

Measured by dividing the percentage change in quantity demanded by the percentage change in income 

If YED>0 the good is a normal good

If YED<0 the good is an inferior good

• The degree of "necessity" of the good (luxury good or basic good)
• The living standards of the economy 

Cross Price Elasticity of Demand

The responsiveness of demand for one good to a change in the price of another good 

Measured by dividing the percentage change in the quantity demanded of good x by a change in the price of another good 

If XPE>0, goods x and y are substitutes 

If XPE<0, goods x and y are complements 

If XPE=0, two goods are unrelated 

Price Elasticity of Supply 

The responsiveness of quantity supplied when the price of the good changes 

Measured by dividing the percentage change in quantity supplied by the percentage change in price 

Importance: determines the extent to which an increase in demand will affect the price and/or quantity of the good in a market. The more price inelastic supply is, the greater the increase in price given an increase in demand.

The time period (short run and long run, whether adjustments can be made)

Extent of excess capacity

Skill of labour 

Long ot short time lags

The speed by which cost rise

Price ceiling 

Government sets a maximum price if it considers the market price too high 

It is set below the equilibrium 

may cause shortages and black markets may emerge 

Price Floor 

government sets a minimum price if it considers the market-determined price as too low

a min price is set above the the equilibrium 

may cause surplus 

consumers hurt by higher prices

Indirect (excise) taxes 

also known as ad valorem tax 

value added tax

imposed on a per unit basis (specific taxes for example 0.8 dollars per pack of cigarettes) 

generally imposed on goods that cause negative externalities

Payment made by governments to firms, to support them

or on  goods that create positive externalities 

Externality 

It is present if an economic activity (production or consumption) creates benefits or imposes costs on third parties for which the latter do not pay or do not get compensated respectively. 

The lead to market failures 

Marginal Private Cost 

The costs of production that the firm takes into consideration in its decision making proces. They include wages, raw materials. 

It is the suppy curve of a firm. 

Pollution

MSC=MPC+external costs 

market fails as it leads to overproduction of the good ignoring the external pollution costs.

vaccines, electric cars

market fails as the last unit produced and consumed exceeds the marginal social cost of production.