Chapter 6: Supply and Demand

Demand curve: shows relationship between price and quantity demanded of a good during a certain period of time * Individual’s demand curve for a good reflects marginal utility received → marginal utility decreases as unit increases * Law of diminishing marginal utility: satisfaction decreases as additional units of a good is consumed within a given period
Law of demand: as the price of a good increases, the demand decreases * And vice versa: as price decreases, the demand increases

Supply curve: shows relationship between price and quantity supplied by a perfectly competitive firm during a certain period of time
Law of supply: as the price increases, the quantity of a good also increases * Marginal cost increases * Marginal cost: additional cost of producing another unit
Market supply curve: shows total quantities of a good that suppliers are willing able able to provide at various prices during a period of time * Horizontal summation of supply curves
Change in quantity supplied: change in price → sellers adjust quantity
Change in supply: change in overall supply

When is there an increase in supply?

Decrease in input costs * If wages, rents, etc. related to the good produced decrease
Improvement in technology
Expectations of lower prices in the future
Increase in number of sellers * More sellers = more supply curves added horizontally
Decrease in price of a substitution during production * Ex) Paper and lumber, milk and cheese * If cost for cheese decreases, more milk will be sold instead
Increase in price of joint product * Ex) Leather and beef * Production of one makes other available * If price of leather increases → more cows will be slaughtered → supply of beef will increase
Lower taxes
Higher subsidies
Lower regulations
Acronym

ROTTEN

Resource costs

Other goods’ prices

Taxes and subsidies

Technology changes

Expectations of suppliers

Number of suppliers

Long-run average cost (LRAC): cost function that represents the average cost per unit for producing a good
Economies of scale * Long-run average cost curve has a negative slope → cost per unit decreases * Due to: * Use of equipment: robots, assembly lines, etc. that increase efficiency when handling large output * Cost of input that does not increase when output increases → spread out over large output * Long term * Ex) Copyright
Diseconomies of scale: exist over range of output when LRAC increases

Increasing returns (to scale): when output increases proportionately more than increases in all inputs * Ex) Doubling all inputs results in more than double the amount of output
Decreasing returns (to scale): when output increases proportionately less than increases in all inputs
Constant returns (to scale): increase in output is equal to increase in input
Diminishing (marginal) returns: additional unit of input increases total input less than the previous unit of input → holds all other inputs constant

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