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Demand
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how much a good is valued; reflects MB
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Supply
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cost of producing a good; reflects MC
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What two things do we use to measure demand?
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price and quantity demanded
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Demand Curve
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a function that shows the quantity demand at different prices; negative slope, downward sloping
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Read a demand curve horizontally
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At $5, people will buy 5 units
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Read a demand curve vertically
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For 5 units, people will pay maximum of $5
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How can demand and supply be expressed?
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table, graph, or equation
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Law of Demand
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demand curve is always downward sloping
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Total Consumer Surplus
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sum of consumer surplus of all buyers; area beneath demand curve and above the price
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When the price of a good increases,
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consumers will buy fewer units
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When the price of a good decreases,
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consumers will buy more units
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How does an increase in demand affect the demand curve?
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shifts outward, up and to the right
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How does a decrease in demand affect the demand curve?
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shifts inward, down, and to the left
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Demand shifters
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income, population, price of substitutes, price of complements, expectations, tastes
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Income
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as people get richer, they buy more goods
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Normal Good
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when income increases, demand of this good increases
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Inferior Good
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when incomes increases, demand of this good decreases (ex. Ramen after college)
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Population
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as population increases, demand increases
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Price of substitutes
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a decrease in price of one good leads to a decrease in demand for the other good (ex. Coke and Pepsi)
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Price of complements
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a decrease in price of one good leads to an increase in demand for the other good (ex. beef and hamburger buns)
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Expectations
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expectation of a higher (lower) price for a good in the future leads to an increase (decrease) in current demand for good (ex. hurricanes and water)
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Tastes
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changes in tastes can increase or decrease demand
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Supply Curve
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function that shows the quantity supplied at different prices; upward sloping, positive slope
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What are two things we use to measure supply?
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price and quantity supplied
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Read supply curve vertically
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When __ units are supplied, sellers are ready to be paid a minimum of $__.
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Read supply curve horizontally
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At price $__, sellers are ready to give a maximum of __ units.
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Law of Supply
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as price increases, quantity supplied increases; positive slope
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Why is supply slope always positive?
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increasing marginal costs/opportunity costs
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Why is demand slope always negative?
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decreasing marginal benefit
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Fixed Supply
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supply curve is straight line; ex. number of paintings by dead artists, number of parking spots
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Producer Surplus
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producer's gain from exchange; Price - WTS/MC/OC
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Total Producer Surplus
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sum all producer surpluses; area above supply curve and below price
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A decrease in costs causes the supply curve to do what?
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shift down and to the right (increase in supply, willing to sell same quantity at lower prices)
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An increase in costs causes the supply curve to do what?
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shift up and to the left (decrease in supply, higher prices are required to sell the same quantity)
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Supply shifters
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technological innovations, changes in the prices of inputs, taxes and subsidies, expectations, entry or exit of producers
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Technological innovations
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lowers costs so supply curve shifts down
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Input example
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oranges are input good for orange juice
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Taxes and subsidies
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taxes increase costs so supply decreases, subsidies decrease costs so supply increase
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Expectations (Supply)
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Expectations of an increase in price for a good, in the future, increases the cost of supplying the good NOW. Thus the current supply of this good decreases, if it can be stored.
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Entry and exit
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entry means more sellers, exit means few sellers (supply curve starts on same point but rotates, does not actually shift)
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