Unit 2 - Supply and Demand Guide

[[2.1 - Demand[[

• Demand: quantity consumers are willing and able to buy at different prices

• Law of Demand: As price increases, demand decreases, and vice versa.

• Determinants of demand: Taste and preferences, related goods, income, buyers, expectations.

• Substitutes: Goods that can replace each other; when the price of one increases, the demand for the other increases.

• Complements: Goods consumed together.

• Income effect: As income increases, demand for normal goods increases, and demand for inferior goods decreases.

* Diminishing marginal utility: As more of a product is consumed, the satisfaction it provides tends to decline.

[[2.2 - Supply[[

• Supply: Quantity of goods/services sellers are willing and able to produce at a given price.

• Law of Supply: As price increases, quantity supplied also increases.

• Shifters of supply:

  1. Resource costs and availability

  2. Other goods and services

  3. Technology

  4. Taxes and subsidies

  5. Expectation of future prices

6. Number of sellers

[[2.3 - Price Elasticity of Demand[[

• Equation: %∆Qd/%∆P

• Elastic demand: Q affected significantly by price changes; >1.

* Inelastic demand: Q not greatly affected by price changes; <1.

[[2.4 - Price Elasticity of Supply[[

• Measures seller sensitivity to price changes

• Elastic supply: Easy to produce more; >1

* Inelastic supply: Difficult to produce more; <1

[[2.6 - Market Equilibrium, Consumer and Producer Surplus[[

• Equilibrium: Qs=Qd.

• Consumer surplus: Price consumers pay - actual price.

* Producer surplus: Actual price - price producer willing to sell.

[[2.8 - Government Intervention in Markets[[

• Shortage: Qs < Qd.

• Surplus: Qs > Qd.

• Price floor: Minimum price; causes surplus.

• Price ceiling: Maximum price; causes shortage.

* Quota: Limit on quantity that can be bought or sold.

[[2.9 - International Trade and Public Policy[[

• Tariffs: Tax on imports/exports.

• Import quota: Restriction on quantity imported.