Supply and Demand

Demand Curve

Represents marginal benefits across a whole market.

Law of Demand

As price increases, quantity demanded decreases; as price decreases, quantity demanded increases.

Supply Curve

Represents marginal costs across a whole market.

Law of Supply

As price increases, quantity supplied increases; as price decreases, quantity supplied decreases.

Equilibrium

Occurs where Marginal Cost equals Marginal Benefit.

P*

Equilibrium price.

Q*

Equilibrium quantity.

Ceteris Paribus

Assume 'all other things being equal' to isolate changes.

Normal Goods

Goods for which demand increases as income increases.

Inferior Goods

Goods for which demand decreases as income increases.

Price of Substitutes

Goods used instead of one another.

Price of Complements

Goods consumed together.

Common Demand Shifters

Income, population of consumers, prices of substitutes and complements, and tastes.

Common Supply Shifters

Production changes, input prices, population of producers, and opportunity cost.

Shifting a Curve

Occurs when costs or benefits change, resulting in movement along the other curve to a new equilibrium.

Possible Outcomes of Curve Shifts

Includes price and quantity changes based on shifts in supply and demand.