Unit 2 - Supply and Demand Guide

All the basics of Supply and Demand which are the foundation of the majority of concepts moving forward.

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### [[**2.1 - Demand**[[

* **Demand**: the quantity which a consumer/buyer are willing and able to buy at different prices
* Movement on the graph: downward sloping
* Demand slopes down on the graph due to:


1. Income effect
2. Substitution effect
3. law of diminishing marginal utility
* **Law of Demand**: As price increases, demand decreases, and as price decreases, demand increases
* **Determinants of demand**:
* Taste and preferences, related goods, income, buyers, expectation of failure

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* **Substitutes** : good/service that can be used in place of another, when price of one increases, consumers will buy more of the other (ex. coffee and tea)
* **Substitution effect**: as the price of a good increases, consumers substitute the good with another that is cheaper
* **Complements** : goods/services that are consumed together (ex. hamburgers and buns)

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* **Income effect**: as income increases, people will buy more of normal goods, and less of inferior goods
* **Normal good** : increase in demand when consumer’s income increases (ex. oreos)
* **Inferior good :** increase in demand when consumer’s income decreases (ex. off brand oreos)

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* **Diminishing marginal utility**: As more units of a product are consumed, the satisfaction/utility it provides tends to decline
* Apple users would purchase at maximum, a limited phones-they wouldn’t purchase a new iPhone every month since that extra phone would offer them no utility or not as much



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### [[2.2 - Supply[[

* **Supply**: different quantities of goods/services which sellers are willing and able to produce at a given price
* **Law of supply:** as price increases, quantity supplied also increases, this is a direct relation.
* The market supply shows the quantity a supplier is willing and able to offer at various prices at a given time

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@@**Reasons for the Law of Supply**@@


1. Rising prices give greater opportunities to suppliers to earn a profit
2. With every additional unit, suppliers face an increase in the marginal cost of production
* Charging higher prices provides them with the easiest way to cover the cost
* The vice versa is also true; lower prices wouldn’t provide the incentive to motivate the supplier and thus reduces the quantity of product
* The supply curve shifts upward, and the movement along the supply curve indicates a change in price.


* **Shifters of supply** :


1. **Resource costs and availability**
* The cost of production (land, labor, capital) has an inverse impact on the supply
* When the cost of these increases, the supplier decides to produce less of the products since he is unable to afford the production cost

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2. **Other goods and services**
* Suppliers who produce more than one product (profit-maximizing firms) have an easier time switching to the production of another product if issues do arise in prices
* E.g. A farmer has land where he is able to produce corn and earn a profit
* If his land is capable to produce wheat as well, in case the price of wheat increases to that of corn, he would switch to wheat production to earn better
* The supply curve in this situation for wheat would shift outwards(more supply) and vice versa for corn(reduced supply)

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3. **Technology**
* Newer technology causes the cost of production to decline and helps improve the efficiency of the supplier
* This allows the supplier to produce more, shifting the supply curve outwards(toward right)
* E.g. machines on the production line help reduce unit costs due to which more products are affordable by the supplier

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4. **Taxes and Subsidies**
* Taxes are added up to the unit cost of production, thus making it more expensive
* Due to this, heavily taxed products are produced in less quantity by suppliers(supply curve shifts towards left)
* Subsidies are the opposite of taxes and help reduce price per unit
* This allows suppliers to produce more of the product(supply curve shifts towards the right)

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5. **Expectation**
* If suppliers expect prices to increase in the future, they would hold back supply for the current time with the future goal of earning more profit later (and vice versa)

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6. **Number of sellers**
* As the number of sellers increases in the market, the supply automatically increases
* This allows consumers more choices at a lower price due to an increase in competition

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### [[2.3 - Price Elasticity of Demand[[

* Equation : %∆Qd/%∆P
* 0 = perfectly elastic,