supply and demand (by peiming and christine)

By:Peiming LinChristine Wu

A market is a group of buyers and sellers of a particular good or service

Competitive marketPerfectly

competitive“Price-takers”

Quantity demanded: amount of a good that buyers are willing and able to purchase

Law of Demand: negative relationship between price of good and quantity demanded

Demand schedule: table showing the law of demand

Market demand: sum of the quantities demanded for each individual buyer at each price

Shifts when people change how much they wish to buy at each price

Increase in quantity demanded at every price demand shifts right (“increase in demand”)

Decrease in quantity demanded at every price demand shifts left (“decrease in demand”)

IncomeNormal good: a

good where an increase in income leads to an increase in demand

Inferior good: a good where an increase in income leads to a decrease in demand

Prices of Related GoodsSubstitutes: two goods

for which an increase in the price of one leads to an increase in the demand for the other

Complements: two goods for which an increase in the price of one leads to a decrease in the demand for the other

Tastes

Expectations

Number of Buyers

Quantity supplied: amount that sellers are willing to and able to sell

Law of Supply: quantity supplied is positively related to the price of a good

Supply schedule: a table that shows the relationship between the price of a good and the quantity supplied

Supply curve: the curve relating price and quantity supplied; the supply curve slopes upward due to the law of supply

Market supply: the sum of the supplies of all sellers

Input prices

Technology

Expectations

Number of sellers

Equilibrium: the intersection of supply and demand

Quantity supplied = Quantity demandedSurplus: quantity supplied > quantity

demanded (excess supply of a good)Shortage: quantity supplied < quantity

demanded (excess demanded of a good)

Law of Supply and Demand: in case of surplus or shortage, the price adjusts to reach equilibrium

Adam Smith’s Wealth of Nations theorized that an invisible hand guides everything towards market equilibrium

A shift in the supply or demand curve changes the market equilibrium

To analyze changes in equilibrium:Determine which changes- supply or demandDecide if the shift is to the right or the leftShow the shift in equilibrium price and

quantity

Note that a change in quantity supplied is different from a change in supplyChange in quantity supplied refers to

movements along the curveChange in supply refers to a shift in the supply

curveWhen both supply and demand change, the

change in price and quantity do not necessarily increase or decrease (it remains ambiguous)

Prices are the signals that guide the allocation of resources; prices are the mechanism for rationing scarce resources