Economics Week 2

Supply + Demand

law of demand

as the price of a good increases, the quantity demanded falls
as the price of a good decreases, the quantity demanded increases

If a factor decreases demand, the graph shifts…?

left

If a factor increases demand, the graph shifts…?

right

How does an increase in income affect demand for normal goods?

demand for normal goods increases (shifts to the right)

How does an increase in income affect demand for inferior goods?

demand for inferior goods decreases (shifts to the left)

What are some examples of normal and inferior goods?

Normal: steak, name-brand clothes, nice cars
Inferior: cheap fast-food, used cars, second-hand clothes, instant ramen

What are complements? What is the relationship between complements regarding price and demand ?

Complements are goods that are consumed together (peanut butter and jelly). As the price of a good increases, the demand for its complement decreases.

What are substitutes? What is the relationship between substitutes regarding price and demand?

Substitutes are goods that are consumed instead of each other (Coca-Cola and Pepsi). As the price of a good increases, the demand for its substitute increases.

How does the number of consumers affect demand?

As the number of consumers increases, demand increases (shifts to the right).

What are the factors that affect demand?

1. change in income

2. change in the price of a related good

3. change in tastes + preferences

4. change in expectations

5. number of consumers

law of supply

as the price of a good increases, the quantity supplied increases
as the price of a good decreases, the quantity supplied decreases

If a factor decreases supply, the graph shifts…?

left

If a factor increases supply, the graph shifts…?

right

input prices

the goods and services that are used to produced a good

How does an increase in input prices affect supply?

profit per unit decreases, supply decreases (shifts to the left)

How does more advanced technology affect supply?

profit per unit increases, supply increases (shifts to the right)

How does a tax on a good paid by producers affect supply?

supply decreases (shifts to the left); profit per unit decreases

How does a subsidy affect supply?

supply increases (shifts to the right); profit per unit increases

How does a tax on a good paid by the buyers affect demand?

demand decreases (shifts to the left)

How does a subsidy for buyers affect demand?

demand increases (shifts to the right)

market equilibrium

when the market price reaches the level where quantity supplied is equal to quantity demanded

What happens when price > equilibrium price?

surplus

What happens when price < equilibrium price?

shortage