Supply & Demand Study Set

Demand

The desire, ability, and willingness to buy a product.

Supply

The amount of a product sellers are willing and able to offer at different prices.

Substitute good

A product that can replace another product, such as tea instead of coffee.

Complementary good

A product used with another product, such as printers and ink.

Inferior good

A product people tend to buy less of when their income increases.

Normal good

A product people tend to buy more of when their income increases.

Elasticity

How strongly quantity demanded or supplied responds to a change in price.

Elastic demand

A small price change causes a relatively large change in quantity demanded.

Inelastic demand

A price change causes a relatively small change in quantity demanded.

Marginal cost

The additional cost of producing one more unit.

Subsidy

Government financial support that can lower production costs and increase supply.

Fixed costs

Costs that stay the same as output changes, such as rent.

Variable costs

Costs that change with production, such as materials.

Overhead

Ongoing business expenses, such as rent, utilities, and administration.

Law of demand

As price rises, quantity demanded usually falls; as price falls, quantity demanded rises.

Law of supply

As price rises, quantity supplied usually rises; as price falls, quantity supplied falls.

What happens to the demand curve when demand increases?

It shifts to the right.

What happens to the demand curve when demand decreases?

It shifts to the left.

What happens to the supply curve when supply increases?

It shifts to the right.

What happens to the supply curve when supply decreases?

It shifts to the left.

Name five determinants of demand.

Tastes and preferences; income; population; related goods; expectations.

How do tastes and preferences affect demand?

A product becoming more popular increases demand; losing popularity decreases demand.

How does income affect demand for normal goods?

Higher income increases demand; lower income decreases demand.

How does income affect demand for inferior goods?

Higher income usually decreases demand for inferior goods.

How does population affect demand?

More consumers generally increase market demand; fewer consumers decrease it.

How does the price of a substitute affect demand?

If the substitute becomes more expensive, demand for the original good may rise.

How does the price of a complement affect demand?

If a complementary product becomes more expensive, demand for the related good may fall.

How do expectations about future prices affect demand today?

Expected higher future prices may increase current demand.

Name five determinants of supply.

Input costs; technology; producer expectations; number of producers; taxes and subsidies.

How do higher production or input costs affect supply?

They decrease supply, shifting the curve left.

How does improved technology affect supply?

It lowers production costs and increases supply, shifting the curve right.

How can expectations of higher future prices affect current supply?

Producers may hold back goods now, decreasing current supply.

How does the number of producers affect supply?

More producers increase market supply; fewer producers decrease it.

How do higher business taxes affect supply?

They increase costs and decrease supply, shifting the curve left.

How do subsidies affect supply?

They lower producers' costs and increase supply, shifting the curve right.

Give an example of elastic demand.

If pizza becomes slightly more expensive, customers may buy much less pizza.

Give an example of inelastic demand.

If soap becomes more expensive, people may still buy nearly the same amount.

What is the difference between demand and quantity demanded?

Demand is the entire curve; quantity demanded is the amount bought at one price.

What is the difference between supply and quantity supplied?

Supply is the entire curve; quantity supplied is the amount sold at one price.

What happens when only a product's own price changes?

There is movement along its supply or demand curve, not a shift of the whole curve.