LESSON 14: Supply and Demand Curves

What is demand in economics?

Demand is the ability and willingness to buy specific quantities of a good at alternative prices in a given time period with ceteris paribus (all else held constant).

What does "ceteris paribus" mean?

Ceteris paribus is the assumption that nothing else changes; it makes it easier to study economics by holding all other factors constant to look at cause and effect.

What is a demand schedule?

A demand schedule is a table showing the quantities of a good a consumer is willing and able to buy at alternative prices in a given time period with ceteris paribus; it shows different quantities demanded at different prices.

What is a demand curve?

A demand curve is a curve describing the quantities of a good a consumer is willing and able to buy at alternative prices in a given time period with ceteris paribus; it is a graphical representation of the demand schedule.

What direction does a demand curve slope?

A demand curve ALWAYS has a downwards slope; higher price means LESS quantity demanded; lower price means HIGHER quantity demanded.

Why does higher price lead to lower quantity demanded?

Because of affordability and opportunity cost; when prices go up opportunity cost also goes up so people buy less.

What is the Law of Demand?

The Law of Demand states that the quantity of a good demanded in a given time period increases as its price falls with ceteris paribus; this results in a negative (inverse) relationship between price and quantity demanded.

What are the Determinants of Demand (what can shift the demand curve)?

Tastes (desire for this and other goods); Income (of the consumer); Other substitute or complementary goods (their availability and price); Expectations (for income prices tastes); Number of buyers.

What is the difference between a movement along the demand curve and a shift of the demand curve?

Movement happens when only price changes (ceteris paribus holds); shift happens when one or more Determinants of Demand change (ceteris paribus is violated and reality kicks in).

What is the difference between "change in quantity demanded" and "change in demand"?

Change in quantity demanded means movement along the same curve due to price change; change in demand means the entire curve shifts to a new position due to Determinants of Demand changing.

What direction does a supply curve slope?

A supply curve is upward sloping; higher prices lead to higher quantity supplied because suppliers make more revenue and profit.

What is the equilibrium price?

The equilibrium price is the point where the demand curve and supply curve intersect; it is where quantity demanded equals quantity supplied. The market considers this the fair price where buyers and sellers agree.

Is equilibrium price permanent?

No it is NOT permanent or stable; it can last a few weeks. Determinants of demand and supply change due to war earthquakes natural disasters lower employment and macro/micro economic changes; market forces constantly put market pressure.

What is the difference between a shift in demand and a shift in supply?

A shift in demand occurs when Determinants of Demand change (tastes income substitutes expectations number of buyers). A shift in supply occurs when Determinants of Supply change (like production costs technology number of sellers). Both shift the curve left or right.

What does a left shift of the demand curve mean?

A left shift means lower quantity demanded at every price; something has changed that makes people want less of the product.

What does a right shift of the demand curve mean?

A right shift means higher quantity demanded at every price; something has changed that makes people want more of the product. This is good for producers because they can make more profit but not good for consumers.

What is the difference between "change in supply" and "change in quantity supplied"?

Change in quantity supplied implies movement along the supply curve due to price change when ceteris paribus is applied. Change in supply means the entire supply curve shifts when the determinants of supply change and ceteris paribus is violated.