Microeconomics: Supply & Demand

Influences on buying plans which change demand

*prices of related goods *expected future prices *income *number of buyers *expected future income *preferences

influences on selling plans that change supply

*prices of related goods *prices of resources and other inputs *expected future incomes *number of sellers *productivity

Change in Demand pt. 2

When demand decreases, the demand curve shifts leftward from D0 to D1. When demand increases, the demand curve shifts rightward from D0 to D2.

Expected future income & credit

When income is expected to increase in the future, or when credit is easy to get and the cost of borrowing is low, the demand for some goods increases. When income is expected to decrease in the future, or when credit is hard to get and the cost of borrowing is high, the demand for some goods decreases.

Preferences

When preferences change, the demand for one item increases and the demand for another item (or items) decreases. Preferences change when: People become better informed. New goods become available.

Change in supply pt. 2

When supply decreases, the supply curve shifts leftward from S0 to S1. When supply increases, the supply curve shifts rightward from S0 to S2

Law of market forces

When there is a shortage, the price rises. When there is a surplus, the price falls. Shortage is the quantity demanded exceeds the quantity supplied. Surplus is the quantity supplied exceeds the quantity demanded.

Change in the quantity demanded

a change in the quantity of a good that people plan to buy that results from a change in the price of the good.

Change in quantity supplied

a change in the quantity of a good that suppliers plan to sell that results from a change in the price of the good.

Change in Demand

a change in the quantity that people plan to buy when any influence other than the price of the good changes. A change in demand means that there is a new demand schedule and a new demand curve.

Substitute in production

a good that can be produced in place of another good.

Competitive Markets

the world of commercial activity where goods and services are bought and sold

Expected future prices

A rise in the expected future price of a good increases the current demand for that good. A fall in the expected future price of a good decreases current demand for that good.

Decrease in Demand and Increase in Supply

Lowers the equilibrium price. The change in the equilibrium quantity is ambiguous because the: Decrease in demand decreases the quantity. Increase in supply increases the quantity.

Decrease in both Demand and Supply

Decreases the equilibrium quantity. The change in the equilibrium price is ambiguous because the: Decrease in demand lowers the price Decrease in supply raises the price.

Increase in both Demand and Supply

Increases the equilibrium quantity. The change in the equilibrium price is ambiguous because the: Increase in demand raises the price. Increase in supply lowers the price.

Law of Supply

Other things remaining the same, If the price of a good rises, the quantity supplied of that good increases. If the price of a good falls, the quantity supplied of that good decreases.

Law of Demand

Other things remaining the same, If the price of the good rises, the quantity demanded of that good decreases. If the price of the good falls, the quantity demanded of that good increases.

Productivity

Productivity is output per unit of input. An increase in productivity lowers costs and increases supply. For example, an advance in technology increases supply. A decrease in productivity raises costs and decreases supply. For example, a severe hurricane decreases supply.

Increase in Demand and Decrease in Supply

Raises the equilibrium price. The change in the equilibrium quantity is ambiguous because the: Increase in demand increases the quantity. Decrease in supply decreases the quantity.

Prices of resources and other inputs

Resource and input prices influence the cost of production. And the more it costs to produce a good, the smaller is the quantity supplied of that good

When supply changes:

The demand curve does not shift. But there is a change in the quantity demanded. Equilibrium price changes in the same direction as the change in supply. Equilibrium quantity changes in the opposite direction to the change in supply.

Number of buyers

The greater the number of buyers in a market, the larger is the demand for any good.

Number of sellers

The greater the number of sellers in a market, the larger the supply.

When demand changes:

The supply curve does not shift. But there is a change in the quantity supplied. Equilibrium price and equilibrium quantity change in the same direction as the change in demand.

Change in supply

a change in the quantity that suppliers plan to sell when any influence on selling plans other than the price of the good changes. A change in supply means that there is a new supply schedule and a new supply curve. A change in the price of one good can bring a change in the supply of another good.

Inferior good

a good for which the demand decreases if income increases and demand increases if income decreases.

Normal good

a good for which the demand increases if income increases and demand decreases if income decreases.

Complement

a good that is consumed with another good. For example, ice cream and fudge sauce are complements. The demand for a good increases, if the price of one of its complements falls. The demand for a good decreases, if the price of one of its complements rises.

Complement in production

a good that is produced along with another good. For example, cream is a complement in production of skim milk in a dairy. The supply of a good increases if the price of one of its complements in production rises. The supply a good decreases if the price of one of its complements in production falls.

Demand Curve

a graph of the relationship between the quantity demanded of a good and its price when all other influences on buying plans remain the same.

Supply curve

a graph of the relationship between the quantity supplied and the price of the good when all other influences on selling plans remain the same.

Demand Schedule

a list of the quantities demanded at each different price when all the other influences on buying plans remain the same.

Supply schedule

a list of the quantities supplied at each different price when all other influences on selling plans remain the same.

Substitute

is a good that can be consumed in place of another good. For example, apples and oranges are substitutes. The demand for a good increases, if the price of one of its substitutes rises. The demand for a good decreases, if the price of one of its substitutes falls.

Market Equilibrium

occurs when the quantity demanded equals the quantity supplied. At market equilibrium, buyers' and sellers' plans are consistent.

Quantity Demanded

the amount of a good, service, or resource that people are willing and able to buy during a specified period at a specified price.

Quantity supplied

the amount of a good, service, or resource that people are willing and able to sell during a specified period at a specified price.

Equilibrium price

the price at which the quantity demanded equals the quantity supplied.

Equilibrium quantity

the quantity bought and sold at the equilibrium price.

Demand

the relationship between the quantity demanded and the price of a good when all other influences on buying plans remain the same. Demand is illustrated by a demand schedule and a demand curve

Supply

the relationship between the quantity supplied of a good and the price of the good when all other influences on selling plans remain the same. Supply is illustrated by a supply schedule and a supply curve.

Market Demand

the sum of the demands of all the buyers in a market. The market demand curve is the horizontal sum of the demand curves of all buyers in the market.

Market supply

the sum of the supplies of all sellers in a market. The market supply curve is the horizontal sum of the supply curves of all the sellers in the market.