Microeconomics

Elastic goods have some or all of the following characteristics:

• Have many substitutes
• Are luxuries
• Have competitive markets
• Are bought frequently

Inelastic Demand (insensitive to a change of price):

• If the price increases, quantity demanded decreases a little.
• If the price decreases, quantity demanded increases a little.

Inelastic goods have some or all of the following characteristics:

• Have few substitutes
• Are necessities
• Have little competition
• Are bought infrequently
• Require a small percent of income
• Are used in the short run

Demand increases for normal goods when income increases. Demand for organic vegetables is an example. Demand for inferior goods, such as canned vegetables, increases when income decreases. This is called the income elasticity of demand.

There is equilibrium when market supply and demand balance each other and, as a result, prices become stable. The government sets price controls, or price floors and ceilings, when there is no market equilibrium.

• Price ceiling is the maximum legal price a seller can charge for a product.
• Price floor is the minimum legal price a seller can charge for a product.

The goal of a price ceiling is to make the product affordable by keeping the price from reaching equilibrium. Price ceilings are maximum prices set for particular goods and services that the government believes are being sold at too high a price. Therefore, consumers need some help purchasing them.

The goal of a price floor is to keep the price from falling to the market equilibrium. Price floors are minimum prices set for certain commodities and services that the government believes are being sold at too low a price. Therefore, their producers deserve some assistance in an unfair market.

The utility maximization rule addresses consumer choice. Utility refers to the usefulness, or satisfaction, that a consumer obtains from any good. The rule states that a consumer attempts to get the greatest value possible from spending the least amount of money when purchasing a good. The consumer’s objective is to maximize the total value obtained from the money that is available.