3: Supply & Demand

Quantity demanded

The amount of a good or service that consumers wish to purchase.

Law of Demand

The principle that price and quantity demanded are inversely related, ceteribus paribus.

Demand schedule

A table showing the relationship between quantity demanded and the price of a product.

Demand curve

A graph representing the demand schedule, illustrating the negative slope where lower prices lead to higher demand.

Demand function

A linear equation representing quantity demanded based on the price, typically denoted as Qd = a - bP.

Shift in the demand curve

A change in demand resulting from factors other than the product's own price, leading to a new demand position.

Normal goods

Goods for which demand increases as consumer income rises.

Inferior goods

Goods for which demand decreases as consumer income rises.

Ceteris Paribus

A Latin phrase meaning 'holding everything else constant' in economic analysis.

Quantity supplied

The amount of a good or service that firms wish to supply.

Supply schedule

A table that shows the relationship between quantity supplied and the price of a product.

Supply curve

A graph representing the supply schedule, illustrating the positive relationship between price and quantity supplied.

Equilibrium price

The price at which quantity demanded equals quantity supplied.

Excess demand

A situation where demand exceeds supply, creating upward pressure on price.

Excess supply

A situation where supply exceeds demand, often leading to a decrease in price.

Change in supply

A shift of the entire supply curve indicating more supply at all price points.

Perfectly competitive markets

Markets where the number of buyers and sellers is large enough that no single entity can influence market price.

Comparative statics

Analysis of changes in equilibrium resulting from a change in a single exogenous variable.

Relative price

The price of one good in relation to the price of another good.

Absolute price

The monetary cost to acquire one unit of a product.

Change in quantity supplied

A movement along the supply curve resulting from a change in price.

Change in demand

A shift in the demand curve due to factors other than the product's own price.

Supply function

An equation describing the quantity supplied based on the price, typically denoted as Qs(P) = c + dP.

Market-clearing price

Another term for equilibrium price, where market supply and demand balance.

Market for high-end organic coffee: If consumer incomes rise significantly, and organic coffee is considered a normal good, what effect will this have on the demand curve, quantity demanded, and equilibrium price, assuming ceteris paribus?

The demand curve for high-end organic coffee will shift to the right, indicating an increase in demand. At every price point, a higher quantity will be demanded. This will lead to an increase in the equilibrium price and equilibrium quantity.

Smartphone market: A new, highly efficient manufacturing process drastically reduces production costs. How will this affect the supply curve, quantity supplied, and equilibrium price of smartphones?

The supply curve for smartphones will shift to the right, indicating an increase in supply. At every price point, a higher quantity will be supplied. This will lead to a decrease in the equilibrium price and an increase in the equilibrium quantity.

Beef market: Suppose a widely publicized health report discourages beef consumption (a demand-side factor) AND a severe drought significantly increases the cost of cattle feed (a supply-side factor). What can be definitively concluded about the new equilibrium price and quantity?

The demand curve will shift left, and the supply curve will shift left. Both shifts put downward pressure on equilibrium quantity, so the equilibrium quantity will definitely decrease. The effect on equilibrium price is ambiguous: it depends on the relative magnitudes of the shifts. If demand shifts further left than supply, price falls. If supply shifts further left than demand, price rises. If they shift equally, price may remain unchanged.

Agricultural market: If the government imposes a price floor above the existing equilibrium price for a specific crop, what economic outcome is likely to occur?

A price floor set above the equilibrium price will lead to excess supply (or a surplus). At the artificial higher price, the quantity supplied will exceed the quantity demanded, as producers are willing to supply more, but consumers demand less at that price.

Distinguish between a 'change in quantity demanded' and a 'change in demand' using the market for apples as an example. What causes each, and how are they represented graphically?

A 'change in quantity demanded' refers to a movement along the demand curve, caused solely by a change in the price of apples (e.g., if apple prices drop, people buy more apples). A 'change in demand' refers to a shift of the entire demand curve, caused by factors other than the apple's price, such as changes in consumer income, tastes, or the price of substitute fruits.