Key Concepts in Demand and Supply Analysis

Inferior Good

Goods where demand decreases when income increases; consumers shift to higher-quality alternatives.

Complements

Goods used together; increased demand for one leads to increased demand for the other.

Demand Curve

Graph showing inverse relationship between price and quantity demanded; always slopes downward.

Elasticity of Demand

Measures how much quantity demanded changes with price; helps in pricing strategy and demand analysis.

Elasticity of Supply

Measures how quantity supplied responds to price changes; shows producer flexibility.

Supply Schedule

Table showing quantity a producer is willing to sell at various prices over time.

Market Supply Schedule

Table showing total quantity all producers will supply at various prices.

Marginal Cost

Extra cost of producing one more unit; important for production decisions and pricing.

Quantity Supplied

Amount of a good producers are willing to sell at a specific price and time.

Marginal Product of Labor

Additional output from hiring one more worker, holding other inputs constant.

Increasing Marginal Returns

Each added input increases output more than the previous input; common early in production.

Diminishing Marginal Returns

Each additional input adds less output than the one before.

Future Price and Current Demand

Expectation of higher future prices increases current demand; expectation of lower prices delays purchases.

Ceteris Paribus

"All other things equal"; isolates the effect of one variable by holding others constant.

Shift in Demand and Supply Curves

Entire curve moves due to external factors, not a change in price.

Law of Demand

As price increases, quantity demanded decreases, and vice versa; inverse relationship.

Law of Supply

As price increases, quantity supplied increases, and vice versa; direct relationship.

Unitary Elastic

Percentage change in quantity equals percentage change in price; revenue stays the same.

Inelastic Supply and Demand

Quantity changes little with price; typical for necessities or low-cost items.

Import Restrictions and Prices

Restrictions (like tariffs or quotas) reduce foreign supply, raising prices for consumers.

Changes in Number of Consumers

More consumers increase overall demand in the market.

Changes in Income

Higher income increases demand for normal goods.

Price of Complementary Goods

Higher price of a complement reduces demand for the related good.

Price of Substitute Goods

Higher price of one good increases demand for its substitute.

Consumer Tastes and Preferences

Increased preference for a good boosts demand.

Consumer Expectations

Expecting future price rises increases current demand; expecting drops decreases it.

Number of Producers

More producers increase total market supply.

Cost of Inputs

Higher input costs reduce supply; lower input costs increase it.

Natural Disasters and International Events

Disruptions reduce supply by damaging resources or infrastructure.

Producer Expectations

Expecting future sales drops increases current supply; expecting future gains decreases current supply.

Technological Improvements

Increased efficiency and lower production costs lead to greater supply.

Government Policy

Subsidies increase supply; excise taxes reduce it.

Fixed Costs

Costs that do not change with production level (e.g., rent, salaries).

Variable Costs

Costs that change depending on output (e.g., materials, labor).

Total Costs

Sum of fixed and variable costs; total expense to produce goods/services.

Subsidies

Government financial help to reduce production costs and encourage supply.

Excise Tax

Tax on specific goods (like alcohol or gas) to raise revenue or discourage consumption.