Supply and Demand Basics

  • Price and Quantity Relationship

    • Setting Price at 4:

      • Supply > Demand

      • Result: Surplus of Product

    • Setting Price too Low:

      • Demand > Supply

      • Result: Shortage of Product

  • Calculating Surplus and Shortage

    • Given specific price levels, calculate sizes of surplus and shortage.

Chapter Test Structure

  • Test Composition:

    • Total of 100 points

    • 50 points from Chapters 5 and 6

    • Chapters 1-4 focus: Simple, straightforward questions

  • Content Focus for Chapter Tests:

    • Covered topics may include consumer and producer surplus, key highlights from Chapter 2.

Supply and Demand Laws

  • Law of Supply

    • Statement: When price (p) increases, quantity supplied (QS) increases.

    • Definition of relationship: Positive, Direct.

      • If p rises, QS rises, and vice versa.

  • Law of Demand

    • Statement: When price increases, quantity demanded decreases.

    • Definition of relationship: Negative, Indirect.

      • If p rises, quantity demanded (QD) decreases.

Movements vs. Shifts

  • Movement Along Curves

    • Caused by changes in price.

    • Example: Increase in Price results in a movement along the supply curve.

    • Movement described: From one point on the supply curve to another due to price change.

  • Shift of Curves

    • Caused by non-price factors (determinants).

    • Example: Increased demand due to non-price determinant shifting the demand curve rightward.

Non-Price Determinants of Supply

  • Examples:

    • Taxes: Increase costs, reduce supply.

    • Subsidies: Decrease costs, increase supply.

    • Technology: Improved technology reduces costs, increases supply.

Non-Price Determinants of Demand

  • Examples:

    • Income:

      • Normal goods: Demand increases as income increases.

      • Example: Steak is a normal good.

      • Inferior goods: Demand decreases as income increases.

      • Example: Bologna is an inferior good.

    • Seasonal Changes:

      • Example: Higher demand for snow boots in winter.

Production Possibilities Curve (PPC)

  • Definition: Economic model illustrating trade-offs between two goods.

  • PPC Characteristics:

    • Linear vs. Nonlinear shapes possible in different contexts.

  • Economic Concepts Illustrated:

    • Efficiency (points on the curve), Inefficiency (inside the curve), and Unfeasibility (outside the curve).

  • Opportunity Cost:

    • Definition: The cost of giving up one good to produce another.

      • Example: Moving along the PPC requires sacrificing units of one good for units of another.

Circular Flow Model

  • Components:

    • Households and Firms interacting in Product and Resource Markets.

    • Product Market: Firms provide goods/services, households provide money.

    • Resource Market: Households provide labor, firms provide income.

  • Economic Principles: Monetary transactions result in equal revenue for firms and expenses for households.

Additional Topics for Consideration

  • Increased Complexity:

    • Expanding circular flow model to include concepts like leakages and injections when considering the macroeconomy.

  • Expanding Vocabulary:

    • Expense vs. Revenue clarity: Household perspective vs. Firm perspective.

  • Impact of Economic Conditions on Demand:

    • Weather, seasonality, trends (e.g., holiday demand).