Economics Supply and Demand

Quantity Demand

the amount or quantity that is demanded by consumers at a specific price set by the seller

Movement Along the Curve

when price and quantity change, but the curve does not shift

Substitution Effects

consumers switch to cheaper alternatives when the price of a good rises or falls

Income Effects

Consumers adjust their consumption based on the change in their real income or purchasing power due to a price change

Demand Curve

shows the relationship between quantity demanded and price for a specific good or service

Law of Demand

inverse relationship between Qd and P (P up, Qd down/ P down, Qd up)

Normal Goods

Demand rises when income rises, and falls when income falls

Inferior Goods

Demand falls when income rises, and rises when income falls

Substitutes

products that can easily replace another product

Complements

products that are used in conjunction with another product

Factors that Shift the Demand Curve

1. Consumer Income

2. Price of Related Goods

3. Consumer Tastes

4. Consumer Expectations

5. Number of Buyer

Quantity Supplied

the amount that producers are willing and able to sell at a specific price

Supply Curve

shows that relationship between quantity supplied and price for a specific good or service

Law of Supply

direct relationship between Qs and P (P up, Qs up/ P down, Qs down)

Factors that Shift the Supply Curve

1. Input costs

2. Technology

3. Number of Producers

4. Expectations of Future Prices

5. Government Policies (Taxes and Subsidies)

6. Natural Disasters

Market Equilibrium

a state where supply and demand are balanced

Market Clearing Price

quantity supplied equals quantity demanded.

Shortages

quantity demanded is greater than quantity supplied

Surpluses

quantity demanded is less than quantity supplied

Price Ceiling

a maxiumu price set by government, which the price of a good or service cannot rise

Price Floor

a minimum price set by government, below which the price of a good or service cannot fall.

Fixed Cost

a cost that does not change with the level of output or production

Variable Cost

a cost that changed indirect proportion to the level of production or output.

Elasticity of Demand

refer to the responsiveness of the quantity demanded of a good or service to change in its price. Measures how much the quantity demanded changes when price changes.

Law of Decreasing Marginal Utility

states that as a person consumes more units of a good or service, the additional satisfaction or “utility” gained from each additional unit tends to decrease.

Revenue

the total amount of money a business earns from its primary operation (sales of goods or service)

Profit

the amount of money a business keeps after subtracting all its costs, expenses, taxes and other financial obligations from its revenue.