MICRO - Supply and Demand

Demand

refers to the willingness and ability of consumers to purchase goods and services at different price levels.

Quantity Demanded

total amount of goods and services that consumers are willing and able to buy at a specific price level.

price increases, quantity demanded decreases; price decreases, quantity demanded increases

Law of demand

Supply

refers to the willingness and ability of producers to sell goods and services at different price levels

Quantity Supplied

the amount of goods and services that the producers are willing and able to sell at a specific price level.

price increases, quantity supplied increases; price decreases, quantity supplied decreases

Law of Supply

Supply curve

• relationship between the quantity of a good that producers are willing to sell and the price of the good

• upward sloping

• the higher the price, the more firms are able and willing to produce and sell..

• relationship between the quantity supplied and the price.

• Qs = Qs(P)

Change in supply

refers to shifts in the supply curve

change in the quantity supplied

refers to movements along the supply curve

demand curve

• relationship between the quantity of a good that consumers are willing to buy and the price of the good.

• Qd = Qd(P)

• shows how the quantity of good demanded by consumers depends on its price.

• downward sloping

• consumers will want to purchase more of a good as its price goes down.

• graphs the demand schedule

Substitutes

two goods for which an increase in the price of one leads to an increase in the quantity demanded of the other.

Complements

two goods for which an increase in the price of one leads to a decrease in the quantity demanded of the other.

Equilibrium (market clearing) price

price that equates the quantity supplied to the quantity demanded.

market mechanism

tendency in a free market for price to change until the market clears.

surplus

situation in which the quantity supplied exceeds the quantity demanded.

shortage

situation in which the quantity demanded exceeds the quantity supplied.

supply curve shifts to the right

new equilibrium where market clears at a lower price and a larger quantity

demand curve shifts to the right

new equilibrium where market clears at a higher price and a larger quantity.

market

a group of buyers and sellers of a particular good or service.

competitive market

a market in which there are many buyers and many sellers so that each has a negligible impact on the market price.

monopoly

Some markets have only one seller, and this seller sets the price. The seller is called __?

demand schedule

a table that shows the relationship between the price of a good and the quantity demanded.

shifts in the demand curve

any change that raises the quantity that buyers wish to purchases at any given price shifts the demand curve to the right. Any change that lowers the quantity that buyers wish to purchase at any given price shifts the demand curve to the left.

normal good

a good for which, other things being equal, an increase in income leads to an increase in demand.

inferior good

a good for which, other things being equal, an increase in come leads to a decrease in demand.

prices of related goods

substitutes and complements

Income, price of related goods, tastes, expectations, number of buyers, population, weather and climate, seasons

8 factors affecting demand / shifts in the demand curve

supply schedule

a table that shows the relationship between the price of a good and the quantity supplied

shifts in the supply curve

any change that raises the quantity that sellers wish to produce at any given price shifts the supply curve to the right. Any change that lowers the quantity that sellers wish to produce at any given price shifts the supply curve to the left.

input prices/ cost of production, technology, expectations, number of sellers, seasons, calamities, taxes & subsidiaries, trade restrictions

8 factors affecting supply/ shifts in the supply curve

tariff, quota, embargo

three types of trade restrictions

Qs = Qd

Formula to get equilibrium price (Pe)