Demand

A schedule or curve showing the amounts of a good or

service that a buyer is willing and able to purchase at
various prices during some time period.

Demand is a statement of a buyer's...

Plans or intentions with respect to the purchase of a

product.

The Law of Demand

The principle that, other things equal, an increase in a

product's price will reduce the quantity of it demanded, and
conversely for a decrease in price.

3 Reasons why price and quantity demanded are

inversely related:

1. Price is an obstacle that deters consumers from buying

(the lower the price, the more people will buy).
2. Diminishing Marginal Utility.
3. The Income Effect and the Substitution Effect.

Income Effect

A change in the quantity demanded of a product that results

from the change in real income (purchasing power) caused
by a change in the product's price.

Substitution Effect

A change in the quantity demanded of a consumer good

that results from a change in its expensiveness (relative to
substitutes) caused by a change in the product's price.

The Demand Curve shows _____ ______ on the

horizontal axis and ______ on the vertical axis.

quantity demanded, price

The Demand Curve illustrates the fact that people...

buy more of a product, service, or resource as its price falls.

Market Demand (Total Demand)

The demand schedule or demand curve of all buyers of a

good or service.

Determinants of Demand

Factors other than price that determine th

Determinants of Demand are sometimes called ______ ______ because they can
cause the demand curve to shift to the left or right.

demand shifters

5 Determinants of Demand

1. Consumers' tastes (preferences).

2. Number of buyers in the market.
3. Consumers' incomes.
4. Prices of related goods (substitute, com
5. Consumer expectations.

Change of Demand

A change in the quantity demanded of a g

demand curve).

Consumers' Tastes for a given product can be affected by...

the introduction of new products.

An increase in the number of buyers is likely to...

increase product demand.

For most products, a rise in income causes an...

increase in product demand.

Normal Goods (desirable goods)

A good or service whose consumption inc

Inferior Goods (less desirable goods)

A good or service whose consumption de

(i.e. used clothing, retread tires).

A change in the price of a related good may either...

increase or decrease the demand for that

good is a substitute or a complementary g

2 Types of related goods:

1. Substitute Good
2. Complementary Good

Changes in consumer expectations may...

shift demand. (i.e. speculating in a "hot" real estate

market).

Change in Quantity Demanded

A movement from one point to another along the demand

curve (not a change in demand or shift in the curve).

Supply

A schedule or curve showing the various amounts of a

product that producers are willing and able to make
available for sale during a specific period.

Law of Supply

The principle that, other things equal, an increase in the

price of a product will increase the quantity of it supplied,
and conversely for a price decrease.

The Supply Curve shows _____ _____ on the horizontal

axis and _____ on the vertical axis.

quantity supplied, price

The Supply Curve shows that price and quantity supplied

are ______ _____.

directly related (positive slope).

The Demand Curve shows that price and quantity

demanded are _____ _____.

inversely related (negative slope).

6 Determinants of Supply:

1. Resource Prices.
2. Technology.
3. Taxes and Subsidies.
4. Prices of Other Goods.
5. Producer Expectations.
6. Number of Sellers in the Market.

Determinants of Supply

Factors other than price that determine the quantity

supplied of a good or service.

Determinants of Supply are sometimes called _____

_____ because they can shift the supply curve left or right
(increasing or decreasing supply).

supply shifters

Higher Resource Prices increase production costs and

ultimately...

reduce supply. (lower profits reduce incentive).

Improvements in Technology enable production with fewer

resources, thus increasing _____ and _____.

profitability, supply

An increase in Taxes (costs) will cause a decrease in

______ and _____.

profitability, supply

An increase in Subsidies (taxes in reverse) will cause an

increase in ______ and ______.

profitability, supply

The Prices of Other Goods in relation to what a

manufacturer is currently producing can sometimes entice
him to...

manufacture the more profitable items, thus decreasing

the supply of the original item.

Changes in Producer Expectations about the future price

of a product may affect...

his willingness to supply that product.

Other things equal, the larger the Number of Sellers,...

the greater the market supply.

Change in Quantity Supplied

A movement from one point to another along a fixed

supply curve.

Equilibrium Price

The price in a competitive market at which the quantity

demanded and the quantity supplied are equal. There is
neither a shortage nor a surplus, and no tendency for
price to change.

Market Equilibrium

The intersection of the supply curve with the demand curve.

Equilibrium Quantity

The quantity demanded and quantity supplied at the

equilibrium price in a competitive market.

The Equilibrium Price remains constant until...

either the supply curve, the demand curve, or both shifts.

Surpluses drive prices _____, and shortages drive prices

_____.

lower, higher

Rationing Function of Prices

The ability of market forces in competitive markets to equalize

quantity demanded and quantity supplied and to eliminate
shortages and surpluses via changes in prices.

Productive Efficiency

The production of a good in the least costly way.

Allocative Efficiency

Production of the particular mix of goods and services most

highly valued by society. (Competitive markets make the
assignments).

If supply is constant and demand increases...

both price and quantity will increase.

If demand is constant and supply increases...

price decreases and quantity increases.

If supply increases and demand decreases...

price decreases and demand will change depending on the

relative size in shifts of the supply and demand curves.

If supply decreases and demand increases...

price will increase and quantity will change depending on the

relative size of the shifts in the supply and demand curves.

If both supply and demand increase...

quantity will increase and price will change depending on the

relative size of the shifts in the supply and demand curves.

If both supply and demand decrease...

quantity will decrease and price will change depending on

the relative size in shifts of the supply and demand curves.

Price Ceiling

A legally established maximum price for a good or service.

(i.e. rent controls, usury laws).

If a Price Ceiling is established (below equilibrium price),

a ______ will occur and ______ will be needed.

shortage, rationing

When shortages result from price ceilings, _____ _____

will flourish.

black markets

Price Floor

A legally established minimum price above the equilibrium

price. (i.e. certain agricultural products, minimum wage).

If a Price Floor is established (above equilibrium price), a

_______ will occur.

surplus

Government controlled prices cause ______ or ______.

shortages, surpluses