• Ceteris paribus, as price increases, quantity demanded decreases (negative relationship)
• Inverse relationship between price and quantity demanded
• Higher price reduces quantity demanded through:
• Income effect: Purchasing power decreases
• Substitution effect: Consumers switch to alternatives
• Diminishing marginal utility: Additional units provide less satisfaction

• Graphical representation of law of demand
• Downward sloping (negative slope)
• Price on vertical axis, quantity demanded on horizontal axis
• Shows relationship between price and quantity demanded, holding all other factors constant

• Change in quantity demanded: Movement along the demand curve caused ONLY by price change
• Change in demand: Entire demand curve shifts caused by non-price determinants
• Important distinction: "Demand" refers to entire curve, "quantity demanded" refers to specific point on curve

• Ceteris paribus, as price increases, quantity supplied increases (positive relationship)
• Higher prices provide profit incentive for producers to increase output
• Direct relationship between price and quantity supplied

• Graphical representation of law of supply
• Upward sloping (positive slope)
• Price on vertical axis, quantity supplied on horizontal axis
• Shows relationship between price and quantity supplied, holding all other factors constant

$E_d = \frac{\%\Delta Q_d}{\%\Delta P} = \frac{\Delta Q/Q}{\Delta P/P} = \frac{(Q_2 - Q_1)/Q_1}{(P_2 - P_1)/P_1}$

Using midpoint method (more accurate): $E_d = \frac{(Q_2 - Q_1)/[(Q_1 + Q_2)/2]}{(P_2 - P_1)/[(P_1 + P_2)/2]}$

• $|E_d| > 1$: Elastic - quantity demanded responds strongly to price changes
• $|E_d| < 1$: Inelastic - quantity demanded responds weakly to price changes
• $|E_d| = 1$: Unit Elastic - proportional response
• $|E_d| = 0$: Perfectly inelastic (vertical demand curve)
• $|E_d| = \infty$: Perfectly elastic (horizontal demand curve)

$Total Revenue (TR) = Price \times Quantity$

$E_s = \frac{\%\Delta Q_s}{\%\Delta P}$

Using midpoint method: $E_s = \frac{(Q_2 - Q_1)/[(Q_1 + Q_2)/2]}{(P_2 - P_1)/[(P_1 + P_2)/2]}$

• Time period: More elastic in long run (firms can adjust production)
• Ability to store output: Storable goods more elastic
• Spare capacity: Extra capacity makes supply more elastic
• Factor mobility: Easily transferable resources increase elasticity
• Time to respond to price changes: Immediate response less elastic

$E_{XY} = \frac{\%\Delta Q_x}{\%\Delta P_y}$

• Measures how quantity demanded of good X responds to price change of good Y
• $E_{XY} > 0$: Substitutes (price of Y up, demand for X up)
• $E_{XY} < 0$: Complements (price of Y up, demand for X down)
• $E_{XY} = 0$: Unrelated goods

$E_Y = \frac{\%\Delta Q_d}{\%\Delta Y}$ (Y = income)

• $E_Y > 0$: Normal good (demand increases with income)
• $E_Y > 1$: Luxury good (demand increases more than proportionally)
• $0 < E_Y < 1$: Necessity (demand increases less than proportionally)
• $E_Y < 0$: Inferior good (demand decreases as income rises)

• Normal goods: Demand increases when income increases
• Examples: Restaurant meals, new cars, designer clothes
• Inferior goods: Demand decreases when income increases
• Examples: Ramen noodles, used cars, public transportation
• Classification depends on consumer income level and economic conditions

• Substitutes: Goods that can replace each other (Coke and Pepsi)
• Positive cross-price elasticity
• Increase in price of one increases demand for the other
• Complements: Goods consumed together (cars and gasoline)
• Negative cross-price elasticity
• Increase in price of one decreases demand for the other

• Equilibrium price: Price at which quantity demanded equals quantity supplied ($Q_d = Q_s$)
• Equilibrium quantity: Quantity bought and sold at equilibrium price
• Market clearing: No surplus, no shortage
• Stable: Market forces push toward equilibrium)

• Difference between what consumers are willing to pay and what they actually pay
• Geometric: Area below demand curve and above market price
• Represents benefit to consumers from market transactions
• Formula: CS = Sigma(Willingness to pay - Actual price) for all units purchased

• Difference between what producers receive and minimum acceptable price
• Geometric: Area above supply curve and below market price
• Represents benefit to producers from market transactions
• Formula: PS = Sigma(Actual price - Minimum acceptable price) for all units sold

• Total Surplus = Consumer Surplus + Producer Surplus
• Measures total benefit to society from market transactions
• Maximum at competitive equilibrium
• Pareto efficiency: Cannot make anyone better off without making someone worse off
• Competitive markets achieve allocative efficiency (maximize total surplus)

• Shortage: $P < P^*$, $Q_d > Q_s$ -> price rises toward equilibrium
• Excess demand: Consumers want to buy more than producers supply
• Upward pressure on price as consumers compete for limited goods
• Surplus: $P > P^*$, $Q_s > Q_d$ -> price falls toward equilibrium
• Excess supply: Producers supply more than consumers want
• Downward pressure on price as sellers compete to sell excess inventory

When both demand and supply shift:

• Government-set maximum price
• Binding (effective): Set below equilibrium price -> shortage
• Example: Rent control
• Creates excess demand ($Q_d > Q_s$)
• Rationing, black markets, reduced quality
• Non-binding (ineffective): Set above equilibrium price -> no effect
• Market equilibrium prevails)

• Government-set minimum price
• Binding (effective): Set above equilibrium price -> surplus
• Example: Minimum wage, agricultural price supports
• Creates excess supply ($Q_s > Q_d$)
• Government may buy surplus or impose production quotas
• Non-binding (ineffective): Set below equilibrium price -> no effect
• Market equilibrium prevails

• Tax on specific goods (gasoline, cigarettes, alcohol)
• Tax increases production cost -> supply shifts left (or demand shifts left if levied on buyers)
• Tax wedge: Difference between price buyers pay and price sellers receive
• Tax wedge = buyer's price - seller's price = tax amount
• Creates deadweight loss (reduced quantity traded)

• Government payment to producers or consumers
• Opposite of tax: reduces production cost -> supply shifts right
• Lowers price for buyers, increases price received by sellers
• Increases quantity traded
• Can create overproduction and inefficiency
• Example: Agricultural subsidies, renewable energy subsidies

• Loss of total surplus caused by market inefficiency
• Results from price controls, taxes, monopolies, externalities
• Represents transactions that would have benefited both buyers and sellers but don't occur
• Geometric: Triangle formed between supply and demand curves
• Larger when price/tax deviation from equilibrium is larger

• Distribution of tax burden between buyers and sellers
• Key principle: More inelastic side bears larger tax burden
• If demand is more inelastic than supply: Buyers pay most of tax
• If supply is more inelastic than demand: Sellers pay most of tax
• Independent of who legally pays the tax (statutory incidence vs economic incidence)

• Tariff: Tax on imported goods
• Raises domestic price above world price
• Reduces imports, increases domestic production
• Creates deadweight loss
• Government collects tariff revenue
• Quota: Limit on quantity of imports
• Raises domestic price above world price
• Similar effects to tariff
• Revenue goes to foreign producers (license holders)
• Both reduce efficiency and total surplus compared to free trade

• World price: Price of good in global market
• Domestic price: Price of good within country without trade
• If world price < domestic price: Country imports good
• If world price > domestic price: Country exports good
• Trade allows countries to consume at lower cost or earn higher revenue