Econ Supply and Demand

Law of Demand

When a good’s price is lower, consumers will buy more of it

Substitution Effect

When consumers consume less of one good and more of other goods (because of price)

Income Effect

The change in consumption resulting from a change in real income

Demand Schedule

A table that lists the quantity of a good that a person will purchase at each price in a market

Drawing of a demand curve

Ceteris Paribus

All other things held constant - the only thing that changes is price

Three things that would cause a change in demand

Income, population, prices of related goods

Normal goods

A good that consumers will demand more of when their incomes increase (shift right)

Inferior goods

An increase in income causes demand for these goods to fall (shift left)

Complements

Two goods that are bought and used together

Substitutes

Goods used in place of one another

Inelastic demand

Relatively unresponsive to price changes (necessities)

Drawing of inelastic demand - closer to vertical

Elastic demand

Very responsive to price changes

Drawing of elastic demand - close to horizontal

If elasticity of demand is less than one

Inelastic

If elasticity of demand is greater than one

Elastic

If elasticity of demand is equal to one

Unitary elastic

Two factors needed to calculate total revenue

Quantity demanded, price

Three reasons for a good or service being elastic or inelastic in demand

Necessity vs luxury, limited budget, availability of substitute goods

The Law of Supply

Producers will offer more goods as the price goes up and fewer as the price falls

Drawing of a supply curve

Marginal product of labor