Chapter 3 Supply and Demand Models

Macroeconomics (Econ 201) ch. 3 supply and demand models study sheet for the midterm

The law of demand

Inverse relationship between the price of a product and the amount of the product that consumers are willing and able to purchase, holding other things constant

Income Effect

the change in the quantity demanded of a good that results from a change in price, making the good more or less expensive relative to other goods that are substitutes

Substitution Effect

The change in the quantity demanded of a good that results from the effect of a change in the good’s price on a consumers’ purchasing power

Ceteris Paribus

 Holding other things constant, the requirement that when analyzing a relationship between two variable other variables must be held constant

Demand curve shifts

cause by a change in something other than price

normal goods

goods for which the demand increases as income rises and decreases as income falls

normal goods examples

clothing, restaurant meals, vacations

inferior goods

goods for which the demand increases as income falls and decreases as income rises

inferior goods examples

second hand clothing and ramen noodles

substitutes

goods and services that can be used for the same purpose

substitutes example

The Big Mac & the Whopper

an increase in price of a product with a substitute causes

an increase in demand for the substitute

a decrease in price of a product with a substitute causes

a decrease in demand for the substitute

complements

goods and services that are used together

complements examples

Big Mac & McDonald’s Fries

An increase in price of a product with a complement would cause

a decrease in demand for its complement

A decrease in price of a product with a complement would cause

an increase in demand for its complement

Change in expected future price

act as substitutes for current products

an expected increase in price tomorrow

increases demand today

an expected decrease in price tomorrow

decreases demand today

supply curve shifts

refers to a change in the quantity supplied at every price point.

inputs

things used in the production of a good or service

increase in price of input

decreases profitability of good and causes decrease in supply

decrease in price of input

increases profitability of good and causes increase in supply

more firms in the market will result in

more product available at given price and an increase in supply

less firms in the market will result in

less product available at given price and a decrease in supply

If firm anticipates that the price of its product will be higher in the future they may

decrease its supply today in order to increase supply in the future

If firm anticipates that the price of its product will be lower in the future they may

increase supply today in order to decrease supply in the future

Change in quantity supplied

a change in the price of the product being examined causes a movement along the supply curve

change in supply

any change besides price of product affecting supply causes the entire supply curve to shift

Market equilibrium

a situation in which quantity demanded equals quantity supplied

Equilibrium price

price at which quantity demanded equals quantity supplied

equilibrium quantity

quantity bought and sold at the equilibrium price

surplus

a situation in which quantity supplied is greater than quantity demanded

surplus prediction

sellers will compete amongst themselves, driving price down

shortage

a situation in which quantity demanded is greater than quantity supplied

prediction

sellers will realize they can increase the price and still sell as much, so the price will rise

Simultaneous Shifts

Both the demand and supply curves shift at the same time

Simultaneous Shifts example

An increase in consumer income and a decrease in the price of a complementary good lead to a rise in demand for both goods.