Economics Unit 2

The law of demand

As the price of a good or service decreases, the quantity demanded increases

All Non-price determinants of demand

Income, Tastes and preferences, Future price expectations, Price of related goods, Number of consumers

Non-price determinants of demand: Income (Normal goods and Inferior goods)

Normal: as income increases, demand increases (this is most goods)

Inferior: demand falls as income rises (the consumer buys higher priced items)

Non-price determinants of demand: Tastes and Preferences

consumers favor one product so it has higher demand at every price

Non-price determinants of demand: Future price expectations

You think price will increase, so more demand in present

Non-price determinants of demand: Price of related goods (in the cases of substitutes and complements)

Substitutes: if items are subs, one price change causes change in demand for other item

complements (purchased together): change in one price causes change in demand for other item

Non-price determinants of demand: Number of consumers (population)

population increase, demographic change, demand increase

Movement vs shift in demand and supply curves

movement: change in price

shift: non-price determinant

The law of supply

as the price of a product rises, the quantity supplied with increase, ceteris paribus

All non-price determinants of supply

Changes in costs of factors of production, Prices of related goods, Indirect taxes and subsidies, Future price expectations, Changes in technology, Number of firms

Non-price determinants of supply: Changes in costs of factors of production (FOPs)

increase in FOP = less supply, vice versa

Non-price determinants of supply: Prices of related goods (in the cases of joint and competitive supply)

joint (produced at same time): demand for one increases = supply for other increases

competitive (producers choose what to make): price increase in one > increase demand > producer wants to supply more

Non-price determinants of supply: Indirect taxes and subsidies

taxes: add to price of product, producers pay tax = increase cost of production and less supply

subsidies: payments made by gov. to reduce cost of production > more supply

Non-price determinants of supply: Future price expectations

producers choose what to supply based on expectations of future price

Non-price determinants of supply: Changes in technology

improved tech = more supply

Non-price determinants of supply: Number of firms

more firms = more supply

Definition of excess demand (shortage):

quantity demanded is greater than quantity supplied at current price

Definition of excess supply (surplus):

more supplied at given price than is demanded

What happens when the market price is below the equilibrium price?

excess demand, QsQd

What happens when the government implements a price ceiling (maximum price)?

Q2 is demanded, Q1 is supplied, excess demand

What happens when the market price is above the equilibrium price?

excess supply, QdQs

What happens when the government implements a price floor (minimum price)?

Q1 is demanded, Q2 is supplied, excess supply

demand curve shifts rightward?

price increases, quantity increases, temporary shortage

demand curve shifts leftward?

price decrease, quantity decrease, temporary surplus

supply curve shifts rightward?

price decrease, quantity increase

supply curve shifts leftward?

price increase, quantity decrease

What happens when both curves shift?

either the price or the quantity will be indeterminate

Resource allocation (signalling and incentive)

signaling: prices are set by actions of consumers and producers

incentive: prices are incentive for producers and consumers