Econ 130 - Chapter 3: Demand and Supply

Demand curve

A graphical representation of the demand schedule; it is a negatively sloped line showing the inverse relationship between the price and the quantity demanded.

Supply

A schedule showing the relationship between price and quantity supplied for specified period of time, other things being equal.

Demand schedule

Schedule of alternative quantities demanded per year at different possible prices.

Changes in Quantity Demanded

A change in a good's own price leads to a change in quantity demanded for any given demand curve, other things held constant. This results in MOVEMENT ALONG the demand curve.

Changes in supply

A change in any ceteris paribus conditions for supply leads to a change in supply. This causes a shift in the supply curve.

Changes in Demand

A change in any of the Ceteris Paribus conditions of demand leads to a change in demand. This causes a SHIFT in demand curve.

Changes and quantity supplied

A change in price leads to a change in the quantity supplied, other things being equal. This is a movement along the curve.

Market

All of the arrangements that individuals have for exchanging with one another.

Ceteris Paribus condition of Supply: Taxes & Subsidies

Certain taxes, such as a per-unit tax, are effectively an addition to production costs and therefore reduce supply. A per-unit subsidy, a payment to a producer from the government, is a deduction in the producer's production cost and would therefore increase supply.

Ceteris Paribus Condition of Demand: Price Expectations

Consumers' expectations regarding future prices and future incomes will prompt them to buy more or less of a particular good without a change in its current money price. Future prices increase: demand today increases. Future prices decrease: demand today decreases.

Ceteris paribus conditions

Determinants of the relationship between price and quantity that are unchanged along the curve. Changes in these factors cause the curve to shift.

Shortages

Excess in quantity demanded.

Surplus

Excess in quantity supplied.

Ceteris Paribus Condition of Demand: Income

Factors other than the price of the good that affect the amount demanded. Shift in demand is dependent on whether the good in question is a normal good or an inferior good.

Ceteris Paribus condition of Supply: Input Prices

If one or more input prices increases or decreases, production costs rise or fall, and the supply curve will shift left (increase) or right (decrease).

Ceteris Paribus condition of Supply: Number of Firms in the Industry

If the number of firms, in a specific industry, increases then supply increases and the supply curve shifts right. If the number of friends, and a specific industry, and decreases then supply decreases and the supply curve shifts left.

Ceteris Paribus Condition of Demand: Market Size

Number of potential buyers in the market. An increase in the number of potential buyers causes an increase in demand; shifting the curve right. A decrease in the number of potential buyers causes a decrease in demand; shifting the curve left.

Ceteris Paribus Condition of Demand: Prices of Related Goods

Related goods are goods for which demand is interdependent. If a change in the price of one good shifts demand for the another good, those two goods have interdependent demands.

Ceteris Paribus Condition of Demand: Tastes & Preferences

Shift in demand to the right, increase, when consumers "like" a particular good or service. Shift in demand to the left, decrease, when consumers "dislike" a good or service.

Market supply curve

Some of the individual producers supply curves.

Relative Price

The money price of one commodity divided by the money price of another commodity; the number of units of one commodity that must be sacrificed to purchase one unit of another commodity.

Money price

The price expressed in today's dollars; also called absolute or nominal price.

Equilibrium

The situation when quantity supplied equals quantity demanded of a particular price. The stable point for price and quantity.

Complements

When a change in price of one good causes an opposite shift in the demand for the other.

Substitutes

When a change in the price of one good causes a shift in demand for the other in the same direction as the price change.

Ceteris Paribus condition of Supply: Technology & Productivity

When new production techniques are available, or otherwise change, the supply curve will shift.

Shifts in Demand (Ceteris Paribus conditions):

Ⓐ Income Ⓑ Tastes & Preferences Ⓒ Prices of Related Goods Ⓓ Future Expectations Ⓔ Market Size

Two types of interdependencies:

Ⓐ Substitutes Ⓑ Complements

Shifts in Supply (Ceteris Paribus conditions):

Ⓐ Technology & Productivity Ⓑ Input Prices Ⓒ Price Expectations Ⓓ Taxes & Subsidies Ⓔ Number of Firms in the Industry

Ceteris Paribus condition of Supply: Price Expectations

A change in the expectation of a future relative price of a product can affect the producers current willingness to supply. If prices increase tomorrow, producers will supply less today and more tomorrow. If prices decrease tomorrow, producers will supply more today and less tomorrow.

Demand

A schedule showing how much of a good or service people will purchase at any price during a specified time period, other things being constant.

The Supply Schedule

A table relating prices to the quantity supplied at each price; a set of planned production rates that depends on the price of the product.

Inferior goods

Goods for which the demand falls when consumer income rises.

Normal goods

Goods for which the demand rises when consumer income rises.

Market demand

The demand of all consumers in the marketplace for particular good or service. The summation at each price of the quantity demanded by each individual.

Supply Curve

The graphical representation of the supply schedule; a line (curve) showing the supply schedule, which generally slopes upward (positive slope), other things being equal.

The Law of Supply

The observation that the higher the price of a good, the more of that good sellers will make available over a specified time period, other things being equal. At higher prices, a larger quantity will generally be supplied then at lower prices. At lower prices, a smaller quantity will generally be supplied then at higher prices.

Market clearing or equilibrium price

The price that clears the market, I would quantity demanded equals quantity supplied; the price where the demand curve intersects the supply curve.

Law of Demand

Ⓐ The observation that there is a negative, or inverse, relationship between the price of any good or service and the quantity demanded, holding other factors constant. Ⓑ When the price of a good goes up, people buy less of it, other things being equal. When the price of a good goes down, people buy more of it, other things being equal.