2.1-2.3 Supply and Demand & Market Equalibrium

Demand

quantity of a good or service that consumers are willing and able to buy at different prices in a given time period

The law of demand

"As the price of a product falls, the quantity demanded of the product will usually increase, ceteris paribus"

Relationship of the demand graph

The demand curve is downward sloping, showing the inverse relationship between price and quantity (Negative Casual Relationship)

The income effect

If the price of a product falls, people's income has more purchasing power

The Substitution Effect

As prices for a good increase, the quantity demanded decreases as consumers seek cheaper substitutes

The Law of Diminishing Marginal Utility

As more units are consumed, the price must fall in order to offset the decreasing additional utility

Result of the change in price

Change in quantity demanded

Shifters of demand

BITER

Buyers

A change in the number of consumers (e.g., population changes

Income

Changes in the level of consumers' income

Tastes and Preferences

Changes in preferences/popularity of products/services

Expectations

Changes in what consumers expect to happen in the future

Related goods

Compliments and substitutes

Complements

Products are usually purchased together

Substitutes

Replacements for a product

Normal Goods

goods for which the demand increases when consumer income

Inferior Goods

goods for which the demand decreases when consumer income rises

When demand is reduced on the graph

Curve shifts left or inward

When demand is increased on the graph

Curve shifts right or outward

The law of supply

The quantity of a good supplied in a given time increases as its price increases (Positive Causal Relationship)

Supply

The quantity of goods and services that producers are illing and able to sell at various prices

Equilibrium Price/Market Clearing

The price at which the quantity of goods and services demanded equals the quantity of goods and services supplied.

Result of change in price

change in quantity supplied, or, a movement ALONG the supply curve

Subsidies and taxes

Subsidies encourage production, while taxes reduce production

Technology

Technological improvements allow firms to increase supply

Other goods

Competitive supply and joint-goods

Competitive supply

other products a firm could make with its factors of production

Joint supply

Increase/decrease in supply of one product causes increase/decrease in supply of a by-product

Number of sellers

How many firms are in the market

Expectations

What firms expect about future prices and economic conditions

Resource costs

The cost of factors of production

Shocks

Unexpected events

Factors that shift the supply curve

STONERS

Result of the change in price

change in quantity supplied

Result of non-price determinants

change in supply

Condition of market equilibrium

The amount of goods people are willing to buy at the equilibrium price (Pe) is equal to the amount of goods (Qe) suppliers want to sell at that price

Shortages

A situation in which the demand exceeds supply and lacks a good ro service

Effect of shortages

Prices will rise until the shortage is eliminated

Surpluses

Occurs when supply exceeds demand, creating an excess of a good or service

Effect of surpluses

Prices will fall until the surplus is eliminated

Price mechanism

forces of supply and demand

3 parts of the price mechanism

Signaling function

Prices of goods act as a signal, providing information for consumers and producers

Incentive function

The price signal creates an incentive for producers and consumers to act in the market

Rationing function

Producer and consumer actions ration and allocate resources within the market

Double shift

One factor (price/quantity) will increase, and the other will be indeterminate

Indeterminate

We don't have enough information to know

Consumer surplus

The extra money you were willing to pay but don't have to

Producer surplus

The extra revenue producers gain by not having to sell at a lower price

Allocative efficiency

The market is producing the optimal level of goods to satisfy consumers and producers in society

Reasons for allocative efficiency

Consumers and producers are satisfied with demand met