Chapter 4 & 5 Notes

demand: amount of a good or service that people buy at various prices.

Only counted when consumers purchase the good/service.

Law of demand: as the price of a good or service goes up, the quantity demanded goes down

Demand curve: line on a graph showing quantity demanded for a good/service at each possible price

Factors affecting Qd

1) Price

2) Diminishing Marginal Utility

3) Substitution Effect

4) Real Income Effect

Price Elasticity of Demand: how much consumers respond to a given change in price

Factors affecting price elasticity

1) Existence of Substitutes

2) Percentage of consumer’s total budget for the purchase of a good

3) How much time consumers have to adjust to price change

Factors that shift the demand curve (Determinants of Demand)

1) changes in population

2) Changes in income

3) Changes in tastes and preferences

4) Existence of substitutes

5) Availability of complementary goods

Supply: amount of a product offered for sale at all possible prices

Law of Supply: as the price rises for a good, the quantity supplied rises; as the price falls, the quantity supplied also falls

A direct relationship exists between price and quantity supplied

Factors affecting quantity supplied

1) Price

2) Law of Diminishing Returns

Determinants of supply:

1) Costs of Inputs

2) Technology

3) Competition

4) Taxes

5) Subsides

6) Government Regulation