U4-Demand and Supply: The Basics Barron's

demand

what consumer buys for a price

law of demand

as price of a product goes up, quantity demand goes down (hence the downward slope of demand curve)

demand curve

graphical representation of demand

law of demand reasons

income effect, substitution effect, and diminishing marginal utility

income effect

as price goes up, more of their income spent, discouraging consumers from buying

substitution effect

if price goes up but substitute doesn't, substitute demand increases, demand for original product decreases

diminishing marginal utility

diminishing utility experienced as more is bought, price must be low to encourage more purchasing

determinants of demand

SPICE (substitutes, preferences and population, income, complements, expectations, and substitutes)

substitutes

good that substitutes for another good

preferences

what the market wants

population

what the market consists of

income

how much money the market has available for purchasing products

complementary goods

good that are sold separately but are highly recommended or needed for usage (gas and cars, water and bottles)

expectations (demand)

what the consumer anticipates in the future (usually regarding prices)

supply

how much is produced

supply curve

graphical representation of supply, slopes upwards

law of supply

as price increases, quantity supplied increases

law of supply reasons

as price increases, producers are incentived to produce more

determinants of supply

ROTTEN (resources, other goods, technology, taxes and subsidies, expectations, number of sellers)

resources

what is used to produce, price and availability influences supply curve

quantity supplied

good produced for a certain price

quantity demanded

good demanded for a certain price

prices of other goods

influence the supply curve of one good (example: farmer chooses to produce soybeans over corn)

technology

improvements can shift supply curve right (cheaper to produce goods)

taxes and subsidies

incentivizes or decentivies producers to produce more

expectations (supplier)

suppliers anticipate future (usually prices of what they produce)

number of sellers

increases or decreases competition

Double Shift Rule

If two curves shift at the same time, either price or quantity will be indeterminate

why is supply curve upwards sloping?

because prices adjust faster than input prices, allowing producers to increase margins as they produce more in the short run

why is demand curve downward sloping?

as price goes up, demand goes downwhy

say’s law states that

supply creates its own demand

reason for say’s law

creating supply allows income, and the income creates demand for supply

in the factor market,

households sell labor, land, and other inputs for income

in the product markets,

firms sell goods and services for consumption expenditures

the demand curve is not found by

adding product demand curves horizontally or vertically

what is the substitution effect?

buyers of a good switch to substitutes of that good when the price of that good goes up

the substitution and income effect….

work together to move the quantity demanded along a downwards-sloping fashioned demand curve