Unit 2 Supply and Demand

market

anywhere that buyers and sellers come together to make an exchange

demand

the quantities of a good or service that consumers are willing and able to buy at different prices during a particular period

demand curve

a graph that shows the combination of price and quantity for a good/service for a market, representing the demand

demand schedule

a table that lists the quantity of a good or service that consumers will buy at different prices

law of demand

higher price = low quantity demanded

lower price = high quantity demanded

price and quantity are inversely proportional

*holds true because of the determinants of demand

income effect

as price decreases, consumers have more dollars to spend, which means they buy more of a good (more quantity is demanded)

substitution effect

as price decreases for a good/service, consumers will switch away from other goods and buy the cheaper one instead because the price is lower, implying demand for that good increases

law of diminishing marginal utility

as consumers consume more of a good/service, it becomes less and less useful to them, therefore the price must decrease in order for consumers to buy more of that good

change in demand

something that causes the entire curve to shift

• if there is an increase in quantity demanded at every single price (curve shifts to the right)

• if there is a decrease in quantity demanded at every single price (curve shifts to the left)

only price changes

a point moves along the demand curve

• only thing that changes is quantity demanded

determinants of demand

factors which cause demand to increase or decrease

• income, price of related goods (substitute & complementary), consumer taste and preferences, expectations for future prices, and number of consumers

income

the amount of money consumers earn and if it increases or decreases can shift a demand curve either right or right

substitute goods

goods that can be easily replaced by another good where if the price for one of them increases, the demand for the other will increase as consumers switch to the cheaper alternative

complementary goods

goods that consumers by together (when the demand for one increases, the demand for the other will increase as well and vice versa)

change in consumer taste and preferences

the determinant of demand that makes people either want or not want more of a good/service, changing demand at all prices

expectations of future prices

if consumers expect a price of a good to increase or decrease in the future, the demand will increase or decrease before the price change occurs

number of consumers

if this increases, the demand will automatically shift towards the right

supply

the quantity of a good/service that producers are both willing and able to offer for a sale at different prices during a given

supply schedule

a table that shows price and corresponding quantities supplied for a good; values correspond profit motive

law of supply

higher price = high quantity supplied

lower price = low quantity supplied

price and quantity are directly proportional

*holds true because of the determinants of supply

profit

how much a producer sells an item for minus the cost associated with producing that good

vertical supply curve

even if price increases, quantity supplied does not change (due to fixed supply of this good/service)

change in supply

as supply increases, the curve shifts right and as supply decreases, curve shifts to the left

determinants of supply

factors which cause supply to increase or decrease

• costs of production, productivity, government intervention, price of related goods, producer expectation of future prices, number of sellers, supply shock

costs of production

supply changes based on factors of production (FOPs)

• if price of FOPs increases, supply decreases

productivity

workers and technology become more trained/efficient; increases supply

government intervention

government policies that directly affect supply, including regulations, subsidies, and taxes

producer expectation of future prices

producers adjust supply based on anticipated price changes to maximize profits

number of sellers

refers to the total count of firms or entities in a market that offer goods or services for sale, impacting overall supply

supply shock

an event that suddenly increases or decreases the supply of a product, causing price fluctuations

market equilibrium

is the point at which the quantity of goods supplied equals the quantity demanded, leading to stable market prices (Qs = Qd)

main steps to analyze supply & demand curves

1. graph it with existing market equilibrium

2. identify shifts in the curve

3. find new market equilibrium

price ceiling

maximum legal price determined by lawmakers to protect consumers from exceedingly high prices (for it to be effective it must be below the market equilibrium)

price floor

minimum legal price set by the government to ensure producers receive a fair return, preventing prices from falling too low (for it to be effective it must be above the market equilibrium)

price is indeterminate

when both supply and demand increase… OR when both supply and demand decrease…

quantity is indeterminate

when supply increases and demand decreases… OR when supply decreases and demand increases…