Demand for Goods and Services

• Economists use the term demand to refer to the amount of some good or service consumers are willing and able to purchase at each price. Demand is fundamentally based on needs and wants. Demand is also based on ability to pay. If you cannot pay for it, you have no effective demand.

law of demand

• Economist call a table that shows the quantity demanded at each price, a demand schedule. A demand curve shows the relationship between price and quantity demanded.

• As the price increases, the quantity demanded decreases, and conversely, as the price decreases, the quantity demanded increases.

Supply of Goods and Services

• When economists talk about supply, they mean the amount of some good or service a producer is willing to supply at each price. A rise in price almost always leads to an increase in the quantity supplied of that good or service, while a fall in price will decrease the quantity supplied.

• that a higher price leads to a higher quantity supplied and a lower price leads to a lower quantity supplied—the law of supply.

law of supply

The law of supply assumes that all other variables that affect supply are held constant.

Equilibrium—Where Demand and Supply Intersect

• he demand curve and supply curve for a particular good or service can appear on the same graph. Together, demand and supply determine the price and the quantity that will be bought and sold in a market.

• The point where the supply curve and the demand curve cross, is called the equilibrium

• The word “equilibrium” means “balance

• if a market is not at equilibrium, then economic pressures arise to move the market toward the equilibrium price and the equilibrium quantity.

The Ceteris Paribus Assumption

• Latin phrase meaning “other things being equal.” Any given demand or supply curve is based on the ceteris paribus assumption that all else is held equal

Price Ceilings

• Laws that government enact to regulate prices are called price controls. Price controls come in two flavors. A price ceiling keeps a price from rising above a certain level (the “ceiling”), while a price floor keeps a price from falling below a given level (the “floor”).

• A price ceiling is a legal maximum price that one pays for some good or service. A government imposes price ceilings in order to keep the price of some necessary good or service affordable.

Price Floors

• A price floor is the lowest price that one can legally pay for some good or service. Perhaps the best-known example of a price floor is the minimum wage.

• Price floors are sometimes called “price supports,” because they support a price by preventing it from falling below a certain level.

Consumer Surplus, Producer Surplus, Social Surplus

• The amount that individuals would have been willing to pay, minus the amount that they actually paid, is called consumer surplus.

• The amount that a seller is paid for a good minus the seller’s actual cost is called producer surplus.

• The sum of consumer surplus and producer surplus is social surplus, also referred to as economic surplus or total surplus.

• The loss in social surplus that occurs when the economy produces at an inefficient quantity is called deadweight loss.