Demand and Supply Study Notes

Demand: The amount of some good or service consumers are willing and able to purchase at each price.
Price: What a buyer pays for a unit of a specific good or service.
Quantity demanded: The total number of units of a good or service consumers are willing to purchase at a given price.
Law of Demand: Keeping all other variables that affect demand constant:
- If price goes up, then quantity demanded goes down.
- If price goes down, then quantity demanded goes up.

Demand Schedule: A table that shows a range of prices for a certain good or service and the quantity demanded at each price.
Demand Curve: A graphic representation of the relationship between price and quantity demanded of a certain good or service, with quantity on the horizontal axis and price on the vertical axis.

Points of a demand schedule are graphed, and the line connecting them is the demand curve (D).
The downward slope of the demand curve illustrates the law of demand, showing the inverse relationship between prices and quantity demanded.

Supply: The amount of some good or service a producer is willing to supply at each price.
Quantity supplied: The total number of units of a good or service producers are willing to sell at a given price.
Law of Supply: Assuming all other variables that affect supply are held constant:
- If price goes up, then quantity supplied goes up.
- If price goes down, then quantity supplied goes down.

Supply Schedule: A table that shows the quantity supplied at a range of different prices.
Supply Curve: A graphic illustration of the relationship between price (shown on the vertical axis) and quantity (shown on the horizontal axis).

The supply curve (S) is created by graphing the points from a supply schedule and then connecting them.
The upward slope of the supply curve illustrates the law of supply, that a higher price leads to a higher quantity supplied and vice versa.

Equilibrium: The combination of price and quantity where there is no economic pressure from surpluses or shortages that would cause price or quantity to change (quantity demanded = quantity supplied).
Equilibrium Price: The price at which quantity demanded is equal to quantity supplied.
Equilibrium Quantity: The quantity at which quantity demanded and quantity supplied are equal for a certain price level.
Surplus or Excess Supply: At the existing price, quantity supplied exceeds the quantity demanded.
Shortage or Excess Demand: At the existing price, the quantity demanded exceeds the quantity supplied.

The demand curve (D) and the supply curve (S) intersect at the equilibrium point E.
The equilibrium price is the only price where quantity demanded equals quantity supplied.
At a price above equilibrium, quantity supplied > quantity demanded (excess supply).
At a price below equilibrium, quantity demanded > quantity supplied (excess demand).

Ceteris Paribus: Latin phrase meaning "other things being equal"; assumes that all else is held equal when examining demand or supply curves.

If income increases:
- Consumers will purchase larger quantities, pushing demand to the right.
- This causes the demand curve to shift right from D0 to D1.
Decreased demand shifts the curve to the left from D0 to D2.

A shift in demand happens when a change in some economic factor (other than price) causes a different quantity to be demanded at every price.
Factors that affect demand:
- Income
- Changing tastes or preferences
- Changes in the composition of the population
- Price of substitute or complement changes
- Changes in expectations about future prices.

Four-Step Process for determining how an economic event affects equilibrium price and quantity:
1. Draw a demand and supply model before the economic change.
2. Decide whether the economic change affects demand or supply.
3. Decide whether the effect causes a curve shift to the right or to the left, and sketch the new curve.
4. Identify the new equilibrium and compare it to the original.

Movements are different than shifts.
A shift in one curve never causes a shift in the other curve. Instead, a shift in one curve causes a movement along the second curve.

Price Controls: Laws that governments enact to regulate prices.
Price Ceiling:
- Keeps a price from rising above a certain level.
- A legal maximum price that one pays for some good or service.
Price Floor:
- Keeps a price from falling below a given level.
- The lowest price that one can legally pay for some good or service.

The original intersection of demand and supply occurs at E0.
If demand shifts from D0 to D1, the new equilibrium would be at E1 unless a price ceiling prevents the price from rising.
With a price ceiling, quantity supplied remains at 15,000, while quantity demanded rises to 19,000, resulting in a shortage.

The intersection of demand (D) and supply (S) occurs at equilibrium point E0.
A price floor set at Pf holds the price above E0 and prevents it from falling.
The result is that quantity supplied (Qs) exceeds quantity demanded (Qd), leading to excess supply, also known as a surplus.

Consumer Surplus:
- The amount individuals would have been willing to pay minus the amount they actually paid.
- Area above the market price and below the demand curve.
Producer Surplus:
- The price the producer actually received minus the price the producer would have been willing to accept.
- Area between the market price and the segment of the supply curve below the equilibrium.
Social Surplus/Economic Surplus/Total Surplus:
- Total surplus = consumer surplus + producer surplus.
Deadweight Loss: The loss in social surplus that occurs when a market produces an inefficient quantity.