DEMAND AND SUPPLYA. Demand- the consumers who want goods and servicesB. Law of Demand- the quantity demanded of a good or service is an inverse function of its price, holdingeverything else constanta. IF price goes up, quantity demanded goes downb. Price goes down, quantity demanded goes up. 1. WHAT are we holding constant?a. other factors (or determinants of demand) that influence the quantity demanded are not changing. 1. Determinants of Demand-a. Price of good itself- CHANGE HERE CAUSES A MOVEMENT b. Prices of other goods and services- CAUSES A SHIFTc. Income- a flow measure, measured over time- SHIFTd. Consumer tastes and preferences- SHIFTe. Population- more population= more demand- SHIFTf. Wealth- a stock measure, measured at a certain point in time- wealth of an individual on 9/18/14: assets, liabilities-SHIFTg. Expected future prices- SHIFTh. Gov. programs-SHIFT2. Income vs. Wealth2. Demand Schedule/ Curvea. Market demand- combining the individual demand curves to get the market demand1. Notes:a. We are holding price constant and summing together the quantities demanded at that priceb. Going to refer to this as the horizontal summation of the demand curves3. Vocabularya. Demand curve- the entire line and sometimes we just say "demand"b. Quantity demanded- looking at a specific quantity associated with a certain price c. Changes in the demand in terms of movements vs shifts1. Movement- caused by changes in the price of the good, only moves ON the line2. Shift- caused by changes in one of the determinants of demand other than a change in price d. Normal good- a good for which demand increases as income increasese. inferior good- a good for which demand decreases as income increases4. Changes in prices of other goodsa. Complements- 2 goods are complements if the demand of good x increases (decreases) when the price of good y decreases (increases) b. Substitutes- 2 goods are substitutes if the demand for good x increases (decreases) when the price of good y increases (decreases)c. Change in populations- shifts to the rightd. Tastes and preferences5. Substitution & Income effectsa. substitution- tendency of people to substitute in favor of relatively cheaper commodities and away from relatively more expensive commoditiesb. income effect- change in people's purchasing power that occurs when other things being equal, the price of one good they purchase changesSUPPLY1. Supplya. Law of Supply- the quantity supplied of a good or service is usually a positive function of price, everything else held constant.1. Usuallya. Totally inelastic supply curve- VERTICAL supply curve (EX: paintings by dead artists, GB Packer Tickets)b. Decreasing cost industry/ Natural monopoly- c. Backwards bending supply of labor curve- 2. Supply Determinantsa. From a firm's prospective1. Price of a good itself (CHANGE HERE IS A MOVEMENT ON THE CURVE)2. Price of factors of production 3. Level of technology and productivity4. Weather5. # of firms in the industry (more productive capacity)6. Expected future prices7. Government programs3. Supply schedulea. at a certain price how many goods would be produced?4. Market Supply- the horizontal summation of the individual firm's supply curvesa. If you have more firms in the market then the curve should be flatter5. Vocabularya. Supply Curve- the whole curveb. Quantity supplied- the amount supplied at a certain pricec. Movements vs. Shifts1. Movement- moves along the line 2. Shifts- change in one of the determinants but no a change in priceDemand and Supply1. Equilibrium- where equilibrium price equates the quantity supplied and quantity demanded. where supply equals demand2. Consumer surplus- the difference b/w the value of the good to the consumer and its price3. Producer surplus- the difference b/w the producer's revenue and the opportunity cost of
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