Economics: Supply & Demand Curves, Equilibrium, and Market Interventions

Supply curve

positive relationship between quantity supplied and price

Demand curve

negative relationship between quantity demanded and price

Equilibrium point

intersection point of the supply curve and the demand curve (Only at EP does Qs = Qd)

Price too low

shortage (Qd > Qs)

Price too high

surplus (Qd < Qs)

Price

primary allocator of resources in a free market system. (invisible hand = Adam Smith)

Shortage exists

prices will rise towards equilibrium

Surplus exists

prices will fall towards equilibrium

Price ceiling

law that says the price is not allowed to go above a certain price. (rent controls, price gouging laws)

Price floors

Law that says the price is not allowed to go below a certain price. (daily price supports, minimum wage)

Demand increase

Demand curve shifts right, Price increases, Quantity increases

Demand Decrease

Demand curve shifts left, Price decreases, Quantity decreases

Supply Increase

Supply curve shifts right, Price decreases, Quantity increases

Supply Decrease

Supply curve shifts left, Price increases, Quantity decreases

Normative Economics

how things should be (opinions, values).

Positive Economics

how things are (facts, testable).

Cost-Benefit Analysis

Used by individuals, firms, and governments. Decision rule = Benefits - Costs.

Substitutes

Price of X ↑ → demand for Y ↑ (e.g., Coke & Pepsi).

Complements

Price of X ↑ → demand for Y ↓ (e.g., Coffee & Cream).

Normal Goods

Income ↑ → demand ↑ (e.g., vacations, restaurants).

Inferior Goods

Income ↑ → demand ↓ (e.g., ramen, cheap beer).

Network Effect

Demand rises as more people use it (e.g., social media, iPhones, colleges).

Exogenous Supply Shocks

Sudden events that decrease supply (e.g., storms destroying crops, war reducing oil supply).

Economics

the study of how society allocates scarce resources

Microeconomics

studies individual markets, firms, consumer

Macroeconomics

studies all markets together (the economy)

Scarcity

a limited amount of resources in society.

Opportunity cost

The cost of something is what you give up to get it. Opportunity cost is the value of the best foregone alternative.

You came to class today. What is your opportunity cost of coming to class

whatever you would be doing if you did not come to class

Specialization

when resources such as labor are devoted exclusively or overwhelmingly to a specific production task

Specialization Example

A tax accountant only does taxes. He doesn’t make his own milk from scratch. A dairy farmer makes milk. He doesn’t do his own taxes.

Trade

The foundation of all business activity. Part of everyday life.

Comparative Advantage

The ability of an individual, firm, or country to produce a good or service at a lower opportunity cost than another.

Absolute advantage

the ability to produce more of a good or service with the same amount of resources, or produce the same amount with fewer resources

Production Possibilities Curve

Illustration of the trade-off society faces from scarcity. (Production Possibilities Frontier)

Resources

Land, Labor, and Capital.

PPC shifting outwards

Good. (More output can be produced given the resources)

PPC shifting inwards

Bad. (pandemic, natural disaster)

Opportunity cost

Slope of PPC between 2 points

Ceteris Paribus

All Else Equal