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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.
Note 
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