Understanding Demand and Supply Curves

Demand Curve

A Demand Curve is the graph of the relationship between the price of a good and the quantity demanded.

Willingness to Pay (WTP)

The maximum amount the buyer will pay for a good.

Law of Demand

Other things remaining the same, if the Price of a good increases the Quantity demanded of the good decreases and if the Price of the good decreases the Quantity demanded of the good increases.

Demand vs. Quantity Demanded

"Demand" is the demand curve of the entire relationship between price and quantity. "Quantity Demanded" is the quantity specified on the X axis for a given price on the demand curve.

Endogenous Variables

Endogenous variables (dependent variables) are variables whose value depends on the value of other variables.

Exogenous Variables

Exogenous variables (independent variables) are variables whose value are determined outside of the system.

Normal Goods

A good for which demand increases as income increases.

Substitute Good

A good that can be consumed in place of another good.

Complement Good

A good that is consumed with another good.

Supply Curve

A Supply Curve is the graph of the relationship between the price of a good and the quantity supplied.

Law of Supply

As Price increases, quantity supplied increases, and vice versa.

Movement along the Demand Curve

If price changes, quantity demanded changes - it is a move along the demand curve.

Movement along the Supply Curve

If price of the good changes, quantity supplied of the good changes, it moves along the supply curve.

Size of the Industry

The more firms in a given market, the greater the quantity supplied at all prices.

Price of Inputs

If the price of inputs increases, the cost of production will increase and producers will reduce the amount they are willing to supply.

Technological Progress

Technological progress increases production efficiency and decreases costs.

Aggregate Demand Curve

Individual demand curves add together to form the market demand curve.

Market Demand Schedule

A table representation of a demand curve.

Demand Schedule

A table that lists the quantity demanded at various prices.

Market Supply Schedule

Lists the quantities supplied at each price when all other influences on a producer's planned sales remain the same.

Quantity Supplied

The amount supplied at a particular price.

Price of Substitute Goods

The demand for a particular good and the price of its substitute have a positive relationship.

Price of Complement Goods

The demand for a particular good and the price of its complement have an inverse relationship.

Increase in Demand

There is an increase in demand when at a particular price, more goods are demanded than before.

Decrease in Demand

This will cause consumers to want to consume less and will decrease demand.

Population Changes

Population growth affects demand; if there are more people in the market, demand increases.

Consumer Preferences

Changes in consumer preferences can shift the demand curve.

Reservation Price

The minimum price that a producer is willing to accept for one unit when exchanging goods or services.

Aggregate Supply Curve

Graphically summing the supply curves for each individual firm to get the total supply.