Econ supply and demand

ceteris paribus

Latin for “Everything else stays the same”. In other words, nothing else about a subject is changing or affecting that subject

• Assuming ceteris paribus, if the weather is nice, we’ll have the party outside

Supply

The quantity of a good/service that producers/sellers make available to consumers in a market at a specific price at a specific time

Demand

The quantity of consumers both WILLING and ABLE to buy a good/service at a specific price and specific time 

• In other words, how much a good/service is wanted by consumers

“Law of Demand”

assuming ceteris paribus, when the price of a good/service increases, the demand decreases.

• Conversely, when the price decreases, demand increases

“Law of Supply”

assuming ceteris paribus, as the price of a good increases, the supply also increases

• Increasing prices incentivize producers/sellers to make/provide more goods/services

Demand Schedule

it’s the curve on a supply and demand graph that represents the data points of quantities consumed of a good /service at a specific price point 

• Demand curve ALWAYS slopes DOWNWARD D-D (demand down)

Supply Schedule

data points on a graph that represent the quantity of a good/service available at a specific price point

• Shown as the supply curve that slopes UPWARD left to right (sUPply to the sky)

Income Effect

The idea that as income increases, consumers will spend more, driving demand higher. But also changing the price itself can make people actually wealthier because they have a higher purchasing power instead of normal wealth

• Increases in wages are offset by increases in price (inflation)

• Describes how changes in consumers’ purchasing power or real income affect the demand for a good or service

Substitution Effect

Consumers will either:

1. Swap expensive goods for cheaper alternatives

2. Substitute other less important expenditures in the budget to consume that expensive good/service

Market Equilibrium

a state where the supply of a product or service equals the demand for it at a specific price, resulting in a stable market condition. At this point the market is said to “clear” because there is no surplus or shortage.

Price Elasticity of Demand

how much the demand for a good fluctuates based on its price

• Measures how sensitive consumers' demand for a good or service is to changes in its price. 

Inelastic Goods

The demand for these does NOT fluctuate with price changes 

• Price goes up, demand mostly remains constant

Aggregate Supply

The total quantity of goods and services that all producers in an economy are willing and able to supply at different price levels over a specific period 

Aggregate Demand

The total demand for a good and service in an economy at a given overall price level and a given time period

Price Ceilings

The maximum price of a good or service imposed by the government to make goods more affordable for high-income households. Example: rent, governments created a price ceiling on rent to make income more affordable. EFFECTS: ineffective over a long period of time, reduced quality of goods, and shortages

Deadweight Loss

When an additional charge (tax) makes the price of a good more than what consumers are willing to spend. A sale is lost . The seller loses revenue, the consumer loses the goods, and the government loses the tax.

Price Floors

The lowest legal price that can be charged for something such as goods, labor, and services

• There can be a surplus, leading to extra goods. Consumers will have to pay higher prices for a smaller amount of goods, pushing some consumers away.

• EX: minimum wage, agriculture (farmer income), tobacco to prevent overconsumption, interest rates (Agricultural Adjustment Act 1933)

• Pros: Competitive markets and stabilizing prices

• Cons: oversupply (Demand DOWN, supply UP, price is over equilibrium) Quality DOWN

Externalities

is something you do that ends up helping or hurting other people, even if they're part of what you're doing. NEGATIVES: a factory makes toys but also pollutes the air, pollution hurts people nearby who do you not work at the factory. work. POSITIVE: When someone plants a tree in their yard, trees cleanair in the nearby areas.

5 Factors that Shift the Demand Curve:

1. Taste and preferences 

2. Population: when consumer behavior is driven by/based on demographics 

3. Income

4. Prices of related goods 

5. Consumer expectations

1st factor that shifts the demand curve 

Taste and preference (D)

2nd factor that shifts the demand curve 

Population (D)

3rd factor that shifts the demand curve 

Income (D)

4th factor that shifts the demand curve 

Prices of related goods (D)

5th factor that shifts the demand curve 

consumer expectations (D)

6 Factors that Shift the Supply Curve:

1. Resources (4 factors) prices

2. Number of Sellers (competition)

3. Technological innovation

4. Prices of related goods

5. Consumer expectations 

6. Government (policies, laws, taxes, subsidies)

1st factor that shifts the supply curve

Resources (4 factors) price (S)

2nd factor that shifts the supply curve

number of sellers (competition) (S)

3rd factor that shifts the supply curve

Technological innovation (s)

4th factor that shifts the supply curve

Prices of related goods (S)

5th factor that shifts the supply curve

Consumer expectations (S)

6th factor that shifts the supply curve

Government (policies, taxes, sbsidies and laws) (S)

Normal goods

goods/services that experience an increasing demand when income increases (EX: steak or organic goods)

Inferior goods

Such that as income increases, the demand for these will decrease (EX: Instant noodles and generic brand items)

Substitute goods

are as prices increase, the demand for substitutes increases (EX: Tea and coffee)

Complementary goods

are such that as prices increase, the demand for complementary goods decreases (EX: Printer and ink)

What is Price Elasticity of Demand, and what are Inelastic Goods?

• Price elasticity of Demand is how much the demand for a good fluctuates based on its price

• Inelastic goods are the demand goods for the demand does NOT fluctuate with price changes. Prices go up, demand mostly remains constant

3 reasons a good is “inelastic”

1. It is a necessity 

2.  No close substitute 

3. Relatively cheap

And sometimes

1. Sometimes it's a luxury

Describe the differences Price ceilings vs. Price floors and what each one causes.

• Price ceilings are the maximum price of a good or service imposed by the government to make goods more affordable for high-income households. 

• Price Floors are the lowest legal price that can be charged for goods, labor, and services

• A price ceiling is usually caused by government intervention intended to protect consumers from high prices. 

• Price floors are caused by the government implementing minimum prices primarily to protect producers and workers from low market prices and to ensure a sustainable income. 

Explain how taxes create a Deadweight Loss.

• Taxes create deadweight loss because they distort market equilibrium by creating a wedge between the price consumers pay and the price consumers pay and the price producers receive, which reduces the quantity of  a good or service traded. 

• You are willing to pay $10 for a sandwich and the seller sells it for $10. The government adds taxes and now the sandwich is $15. At $15 you don’t think it is worth the price so the seller loses the potential sale and revenue. The lost sale represents the deadweight loss.

Consumer Surplus

when a consumer pays less then they were willing to pay. 

EX: your willing to pay $5 for population but you get it for $1, that is $4 surplus

Producer Surplus

The difference between the price for a good and the price that is actually recieved.