2011-10-17 Supply and Demand Quantity demanded: amount of a good or service that consumers want to buy for a period

of time; a single point on the curve QD refers to a flow of purchases, that is, a quantity per period of time Change in quantity demanded: movement along the demand curve Demand: the entire relationship between price and wanted quantity; the entire curve Change in demand: shift of the demand curve Is affected by o consumers income average income increases: a) demand for normal goods increase (shift right), b) demand for inferior goods decrease (shift left) distribution of income (e.g. higher taxes for childless households; lower taxes for households with children): demand for goods that the now higher income earners want rise (shift right); demand for goods that the now lower income earners want decrease (shift left) o price of other products prices of substitutes in consumption increase: demand for product in question increases (shift right); vice versa price of complements in consumption increase: demand for product in question decreases (shift left) o tastes change in taste for a product (e.g. computers to typewriters): demand increases for the product increases (shift right); vice versa o population increase in population: demand increases (shift right); vice versa o expectations about the future expect prices to rise; demand increases today (shift right); vice versa Demand schedule: a table showing the relationship between price and quantity, ceteris paribus Shifts in the supply curve are caused by: Price of inputs or production costs o Increase in production costs: decrease in supply (shift up/left) Technology o Causes reductions in production costs: increase in supply (shift down/right) Government taxes or subsidies o Taxes increase production costs: decrease in supply (shift up/left) o Subsidies increase profitability: increase in supply (shift right) Prices of other products o The price of a substitute in production increases: supply of product in question will decrease (firms would rather produce the other product) (shift left)

o The price of a complement in production increases: the supply of the product in question will increase as well (firms try to produce more of the other product, by doing this they produce more of the product in question) (shift right) Number of suppliers o Increase in the number of suppliers: supply increases (shift right)

Determination of Price Market: a place where buyers and sellers negotiate prices and exchange goods and services Excess demand: at a given price, quantity demanded exceeds quantity supplied Excess supply: at a given price, quantity supplied exceeds quantity demanded Equilibrium price: the price at which quantity demanded is equal to quantity supplied; the price that clears the market Disequilibrium price: a price that causes a shortage or surplus; quantity demanded does not equal quantity supplied Comparative statics: the comparison of two different economic outcomes, before and after a change in some underlying exogenous parameter Four laws of supply and demand; regarding shifts of the curves: 1. An increase in demand: equilibrium price and quantity is increased 2. A decrease in demand: equilibrium price and quantity is decreased 3. An increase in supply: equilibrium price is decreased, equilibrium quantity is increased 4. A decrease in supply: equilibrium price increases, equilibrium quantity decreases Absolute price: the amount of money that is used to acquire one unit of a product Relative price: the ratio of the money price of one item to the money price of another item; a ratio of two absolute prices. * a change in price referred to in supply and demand curves concerns the relative change in price of one product compared to all other products; for if all products are increasing at a rate of 30% per year and product A is increasing at a rate of 20% per year, product A is decreasing in price relative to all other products