Ch 4 Supply & Demand Model

Class notes

Law of demand

there is a negative/inverse relationship between the price of a good and quantity demanded of good, ceteris paribus (as price increases, quantity demanded decreases; as price decreases, quantity demanded increases)

negative/inverse relationship between price of a good and quantity demanded of good

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

non-price determinants of demand

tastes/preferences (popularity),

consumer income (normal/inferior goods),

prices of related goods (substitutes/complements),

number of buyers, consumer expectations

tastes/preferences

popularity increases, demand increases, demand curve shifts to right;

popularity decreases, demand decreases, demand curve shifts to left

popularity increases

demand increases, demand curve shifts to right

popularity decreases

demand decreases, demand curve shifts to left

normal good

good for which income & demand are postively related; income increases, demand increases; income decreases, demand decreases

income increases

demand for normal good increases but demand for inferior good decreases

income decreases

demand for normal good decreases but demand for inferior good increases

inferior good

good for which income & demand are negatively related; income decreases, demand increases; income increases, demand decreases

consumer income

non-price determinant of demand related to normal and inferior goods

prices of related goods

non-price determinant of demand related to substitutes and complements

substitutes

goods for which there’s a positive relationship between price of good & demand for related good; price of good increases, demand increases; price of good decreases, demand decreases

complements

goods for which there’s a negative relationship between price of good & demand for related good; price of good increases, demand decreases; price of good decreases, demand increases

price of related good increases

demand for substitutes increases but demand for complements decreases

price of related good decreases

demand for substitutes decreases but demand for complements increases

number of buyers

positive relationship between # of buyers & demand of particular good

consumer expectations

can affect current/future demand of good

movement along demand curve

caused by change in price & leads to change in quantity demanded

shift in demand curve

caused by any non-price determinant & leads to change in demand

law of supply

there’s a positive/direct relationship between price of good & quantity supplied of good, ceteris paribus (as price increases, quantity supplied increases; as price decreases, quantity supplied decreases)

positive/direct relationship between price of good & quantity supplied of good

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

non-price determinants of supply

technology,

resource costs,

acts of nature,

number of sellers,

producer expectations

technology

improvements/advancements lead to increase in quantity of supply; shift to right

resource costs

increase in production costs leads to decrease in quantity of supply; shift to left

acts of nature

depends on type, can lead to increase/decrease in quantity of supply

number of sellers

increase of producing good, quantity of supply also increase & vice versa

producer expectations

if suppliers expect higher price in future, they’ll want to sell less now to sell more later to gain more revenue

movement along supply curve

caused by change in price & leads to change in quantity supplied

shift of supply curve

caused by any non-price determinant & leads to change in supply

equilibrium

occurs at the price in which quantity demanded & quantity supplied are equal

shortage

price is below equilibrium price & results in quantity demanded > quantity supplied

surplus

price is above equilibrium price & results in quantity supplied > quantity demanded