Supply and demand are inversely proportional: When supply rises, demand falls. For instance, when the housing market in a certain region is flooded with homes for sale, sellers drop the price to attract a buyer. However, single homes for sale in exclusive neighborhoods might have more potential buyers than sellers. In these instances, the price of the home rises.
Gregory Mankiw, Harvard Economics professor and author of "Principles of Economics" explains that society experiences a short-run trade-off with rising prices and unemployment: As the monetary supply expands and inflation occurs, unemployment rises. However, the Phillips curve indicates that in the long-run, inflation has no bearing on levels of unemployment.
Price controls, like setting food prices in the former Soviet Union or rent control in New York, have negative effects for both buyers and sellers. Price ceilings create shortages and rationing of goods, and price floors create disincentives to improve on the quality of a good when it cannot be sold at the equilibrium price.
Elasticity measures price responsiveness of a good or service. If the demand for a product changes significantly when the price changes, it is considered elastic. Examples of elastic goods include makeup and concert tickets. Inelastic goods show little or no change in demand when the price changes. Examples include electricity and gas.
The goal of a firm is to maximize profit. William McEachern explains in the book, "Microeconomics: A Contemporary Introduction" that perfectly-competitive firms maximize profit when the marginal cost equals the marginal revenue. When this equilibrium is reached, the firm can stay competitive and profitable. When marginal cost exceeds the marginal revenue, the firm exits the market.
Consumers wish to maximize their utility within their budget constraint. Simply put, consumers try to "get the most bang for their buck." Consumers make decisions to buy luxury, normal or inferior goods based on their income.
The textbook, "Business Economics" states perfect competition occurs when there are many firms selling identical products. The firm accepts the market price, and is not a price-maker.
Monopolies occur when firms are able to set the price of a specialized good or service due to limited or no competition. The firm is a price-maker and consumers must accept the price due to no alternatives.
Oligopolies are small groups of firms offering a similar good or service. Game theory suggests the price of these goods remains at or below a competitive price because each of the firm tries outbidding the other to gain market share. Examples of oligopolies include airlines and cable companies.
Negative externalities are an external consequence of an action. Pollution and waste are good examples of a negative consequence caused by companies who pay no price for these consequences.