Chapter 3: Supply and Demand

Law of Demand

Law of Demand

If Price increases Quantity demanded decreases

If Price decreases, Quantity Demanded increases

Diminishing Marginal Utility

As you buy more of a good, utility of subsequent units declines

Demand Determinants

(ENTIR)

Expectations, Number of Consumers, Tastes, Income, Related Goods (complements and substitutes)

Change in Price causes Change in Quantity Demanded

Supply Determinants

(ROTTEN)

Resource Prices, Other Goods, Technology, Taxes and Subsidies, Expectations, Number of Suppliers

change in prices causes change in quantity supplied

Shortage

Price increases, Quantity increases

Surplus

Price decreases, Quantity decreases

Effective price floor creates

a surplus

effective price ceiling creates

a shortage

If supply and demand increase, what happens to price and quantity?

Price is indeterminant, Quantity increases

If supply and demand decrease, what happens to price and quantity?

Price is indeterminant, quantity decreases

If supply increases and demand decreases, what happens to price and quantity?

Price decreases, Quantity is indeterminant

If supply decreases and demand increase, what happens to price and quantity?

Price increases, Quantity is indeterminant