Supply and Demand NotesDEMAND

• Different people place different valuation on the same good. Meaning they will pay different prices for the same good (Love, Like, Hate relationship)

• In general, people want to buy more of any good at lower prices. And they will buy less at higher prices, this is called the LAW OF DEMAND. But it does not tell us how much more or less.

SUPPLY• Producers are driven by the profit motive.• Therefore they will supply more of a good at

higher prices, and less of the good at lower prices. This is called the LAW OF SUPPLY.

• These laws apply to normal goods, but not inferior goods.– Normal goods = income rises, we want more– Inferior goods = income rises, we want less

Determinants of Demand

1. Tastes and Preferences

2. Income

3. Population

4. Substitutes (PowerAde over Gatorade)

5. Complements (Tires and cars)

Determinants of Supply

1. Size of Industry

2. Technology

3. Cost of Inputs (steel prices for cars, rubber for tires or weather)

4. Price of Related Outputs (price of tablets goes up

**As more firms enter the industry, the market supply curve will shift out, driving down prices.

• Changes in determinants will cause a shift in that line, which is a whole new line.

• The price change is always caused by a shift.

• Shift in Demand = Change in demand– This a whole new line

• Movement Along Demand = Change in Quantity Demanded– This is the same line

Shifts and Movements