Microeconomics 1201 Chapter 3

Derek Johnson - UCONN

Demand

The quantity of a good or service that consumers are willing and able to buy at different prices during a certain time period.

Law of Demand

As price of a good rises, the quantity demanded falls (CETERIS PARIBUS)

• Inverse relationship between price of a product and the quantity demanded. When the price falls, the quantity demanded increases.

Demand Schedule

Table showing price v demand demanded

Demand Curve

Graph showing the relationship between price and quantity demanded (slopes downward)

Supply

The quantity of a good or service that producers are willing and able to sell at different prices during a certain time period.

Law of supply

As the price of a good rises, the quantity supplied rises.

Supply Schedule

A table showing price vs. quantity supplied

Supply Curve

A graph showing the relationship between price and quantity supplied (Slopes upward)

Market Demand

The total quantity of a good or service that all consumers in a market are willing and able to buy at each price.

• Individual demand curve: how much one person will buy at various prices

• Market demand curve: shows how much everyone combined will buy at various prices.

• Add up the quantity (x axis).

Increase in demand looks like a shift on a graph to the _____.

Right

Decrease in demand looks like a shift to the ______.

Left

Substitute Goods

A product that can be used in place of another.

• Price of a substitute good and demand for the other good are directly related.

Complementary Goods

Goods that go well with another product

• Inverse relationship

• Peanut butter and jam

Apple Article

Introduces the new Iphone. By trying to increase the demand schedule and how much were willing to pay because they’re increasing the quality.

Normal Good

• Increase in income, increase in demand

• Decrease in income, decrease in demand

• Computers, Cars, Phones

Inferior Good

• Increase in income, decrease in demand

• Decrease in income, increase in demand.

• Potatoes, Ramen

Changes in Demand

• Movement of curve from left to right

• Right - Buy more

• Left - Buy less

Changes in the Quantity Demanded

• Movement on the schedule

• Changes in price

• A movement along the demand schedule

Ceteris Paribus

When studying how one variable affects another, all other relevant factors are held constant.

• Lets economists see only the impact of price changes on demand.

Variables that shift market demand

Income (Normal & Inferiror Goods), Prices of related goods (Substitutes, Complements), Tastes, changing demographics, preferences, environmental concerns, etc.

A Change in supply VS Change in Quantity Supplied

Change in Supply

• Shift of the supply curve due to the changes in variables other than the product’s price

Changes in Quantity Supplied

• Refers to a movement along the supply curve due to a change in the products price

Market Eqilibrium

Occurs where market demand curve intersects the market supply curve

• The quantity of goods consumers are willing to buy equals the quantility firms are willing to sell.

• Competitive Market Equilibrium

Market Equilibrium determines _____.

Prices

• Determined by both demand and supply

Assets

Anything of value owned by the firm

Liabilities

Debts or obligations owned by the firm

Stockholders’ Equity

Also known as net worth, it represents the ownership interest of shareholders

Supply Decline

A shortage of semiconductors reduced the supply of new cars, increasing new car prices and pushing consumers to the used car market.

Surpluses

Prices above equilibrium, with the quantity supplied being greater than the quantity demanded.

Substitution Effect

Explains law of demand.

Change in quantity demanded of a good results because a change in price makes the good more or less expensive related to other goods

• Example: Price of a water bottle falls, people will substitute buying water bottles for buying other goods, such as bottled spring water.

Income effect

Explains law of demand

Change in the quantity demanded of a good that results because a change in the good’s price increases or decreases consumers’ purchasing power.

Example: When the price of water bottles fall, the increased purchasing power of consumers’ incomes will usually lead them to purchase a larger quantity of water bottles.

Ceteris Paribus Condition

Necessity of holding all variables other than price constant in constructing a demand curve. “All else equal” in Latin.

A shift of a demand curve is an increase/decrease in ______. A movement along a demand curve is either increase/decrease in the ________ _________.

1) demand 2) quantity demanded

An increase in income (and the good is normal) shifts the demand curve to the right because…

consumers spend more of their higher income on the good. 

An increase in income (and the good is inferior) shifts the demand curve to the left because…

consumers spend less of their higher incomes on the good.

• Ramen

• Cans of Tuna

An increase in the price of a substitue good shifts the demand curve to the right because..

consumers buy less of the substitute good and more of this good.

An increase in the price of a complementary good shifts the demand curve to the left because ….

consumers buy less of the complementary good and less of this good. 

An increase in the taste for the good shifts the demand curve to the right because…

consumers are willing to buy a larger quantity of the good at every price.

An increase in population shifts the demand curve to the right because…

additional consumers result in a greater quantity demanded at every price.

An increase in the expected price of the good in the future shifts the demand curve to the right because…

consumers buy more of the good today to avoid the higher price in the future. 

An occurrence of a natural disaster or pandemic shifts the demand curve BOTH ways because…

consumers buy less of most goods but more of a few goods.