Chapter 3 - Supply and Demand PDF

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Demand: The law of Demand: An inverse relationship between price and Quantity demanded. As price decreases, quantity demanded increases, and vice versa. There are 3 reasons why the demand curve is downward slopping: The Substituting effects: Price goes down for Milk gives consumers an incentive to buy from this specific product, and vice versa The Income effects: When the price goes down, the purchasing power of consumers increases, and vice versa. The law of Diminishing marginal Utility effect: Consumers will eventually feel less satisfied with a specific product as they consume it more.

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5 Shifts of Demand:

Anything other than price shifts the demand curve.

Tastes and Preferences Number of consumers (Population) Price of related goods o Complements and Substitutes: A substitute: Pepsi and coke. A complement would be as cereal and milk. Income o Normal goods and Inferior goods. Expectations

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Change in Quantity demanded vs A change in Demand: P

Movement from B to C is a change in Quantity B Demand Quantity demanded.  demanded C (Movement A long the A to B Increase Same  curve) A  B to C Same Increase Movement from A to B Increase increase D’ A to C is a change in Demand D (A shift of the demand Q Q0 Q1 Curve) :- Price only shifts quantity demanded a long the demand curve while the 5 shifters shift the demand curve. -

Double Shift rule: When there is a change in both demand and supply curves, either quantity or price will not be determined.

The law of supply: A direct relationship between the price and quantity supplied. As price increases, suppliers have the incentive to produce more products because it would increase their profits, and vice versa. Supply: -

An upward slopping curve, because as price increases, Quantity supplied increases. A change in price results in movement a long the supply curve. An increase in supply shifts to the right and a decrease of supply shifts to the left.

5 Shifters of the Supply curve: -

Price of resources (Increased prices means less supply)

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Number of producers (Increased Producers means increased Supply)

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Technology (Increases productivity which increases supply)

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Taxes and Subsidies (More costs, Decreases Supply)

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Future Expectations (Can increase or decrease)

Market Equilibrium: -

The point of intersection between the Quantity supplied and Quantity demanded, where suppliers produce a specific product at a given price and consumers are willing to buy this product at this price.

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Any point above the Market Equilibrium is called A Surplus.

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Any point below the Market Equilibrium is called a Shortage.

Exercise: https://www.youtube.com/watch?v=9QSWLmyGpYc https://www.youtube.com/watch?v=K0AQ9rK8MN4! -

For Substitutes: As the price of good A increases, The Quantity demanded for good A decreases, But the Overall demand of Good B increases.

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For Complements: As price of Good A increases, The Quantity demanded for good A decreases, but the overall demand for Good B decreases as well.

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Normal Good: As income increases. The demand curve increases as well because the purchasing power increased, and as the income decreases, the demand curve decreases as well, because the purchasing power is now weaker.

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Inferior Good: As income decreases, the demand curve increases because of the lower purchasing power of this good, and when income increases, demand decreases....