Supply and Demand (By Peiming and Christine)
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Transcript of Supply and Demand (By Peiming and Christine)
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By:Peiming LinChristine Wu
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A market is a group of buyers and sellers of a particular good or service
Competitive marketPerfectly
competitive“Price-takers”
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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
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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”)
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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
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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
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Tastes
Expectations
Number of Buyers
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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
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Input prices
Technology
Expectations
Number of sellers
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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)
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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
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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
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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)
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Prices are the signals that guide the allocation of resources; prices are the mechanism for rationing scarce resources
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