Demand & Supply

Demand

The quantity which a consumer/buyer is willing and able to buy at different prices.

Law of Demand

As price increases, demand decreases, and as price decreases, demand increases.

Determinants of Demand (TRIBE)

Taste and preferences, Related goods, Income, Buyers, Expectation of failure.

Substitutes

Goods/services that can be used in place of another; when the price of one increases, consumers will buy more of the other.

Substitution Effect

As the price of a good increases, consumers substitute the good with another that is cheaper.

Complements

Goods/services that are consumed together, such as hamburgers and buns.

Income Effect

As income increases, people buy more normal goods and less inferior goods.

Normal Good

A good for which demand increases when consumer income increases.

Inferior Good

A good for which demand increases when consumer income decreases.

Diminishing Marginal Utility

As more units of a product are consumed, the satisfaction/utility it provides tends to decline.

Supply

Different quantities of goods/services which sellers are willing and able to produce at a given price.

Law of Supply

As price increases, quantity supplied also increases; this is a direct relationship.

Reasons for the Law of Supply

Rising prices provide greater profit opportunities; marginal costs increase with each additional unit produced.

Shifters of Supply

Factors that can cause the supply curve to shift, including resource costs, technology, taxes, and the number of sellers.

Resource Costs

The costs of production such as land, labor, and capital that inversely impact supply.

Technology in Supply

New technology reduces production costs, improving supplier efficiency and allowing for greater supply.

Taxes and Subsidies

Taxes increase the cost of production (decreasing supply), while subsidies decrease unit costs (increasing supply).

Expectation in Supply

If suppliers expect future prices to increase, they may hold back current supply to maximize future profits.

Number of Sellers

An increase in the number of sellers in the market automatically increases supply and enhances competition.