Chapter 4 Law of Demand If quantity demand falls other things equal Eg If opportunity cost falls the quantity demanded increases other things equal Alfredo buys only 2 goods and spend all his income on them salad and pizza The prices of these two goods in 2012 and 2013 are salad 2 per lb in 2012 4 per lb in 2013 pizza is 12 in 2012 18 in 2013 Suppose Alfredo has enough income in 2013 to buy the same amounts as in 2012 Will Alfredo buy more less or the same number of pizzas in 2013 as compared with 2012 In this case all things are NOT EQUAL because price of salad changes too O C of pizza in terms of salad in 2012 6 O C of pizza in terms of salad in 2013 4 5 2013 have lower opportunity cost so Alfredo will still buy pizza Eg Where are you more likely to find the Italian leather goods Rome or New York Why Rome high quality goo 100 transportation cost 100 NYC 200 Low quality good 50 transport 100 NYC 150 Supply Quantity supplied the amount that sellers are willing and able to sell Law of supply Other things being equal when the price of a good rises the quantity supplied of the good also rises and when the price falls the quantity supplied falls as well variables that can shift the supply curve Input prices wages prices or raw material number of sellers technology expectations Eg Draw a supply curve for tax return preparations software What happens to it in each fo the following scenarios A Retailer B A tech advance allows the software to be produced at lower cost C Professional return Change in Quantity Demanded As its own price change it moves along the demand curve Shift in Demand As other related forms change demand shifts Equilibrium Quantity supplied quantity demanded Surplus When quantity supplied is greater than quantity demanded Supply demand surplus Competitive Market a market with many sellers and buyers that each has a negligible impact on the market price Quantity Demanded the amount of the good that buyers are willing and able to purchase Demand Schedule a table that s show the relationship between rice of goods and quantity demanded Demand Curve The line relating price and quantity demanded Market Demand the sum of all the individual demands for a particular good or service Normal good If income goes down demand for goods goes down Inferior good If income goes down price and quantity goes up Eg Bus ride Substitutes When a fall in the price of one good reduces the demand for another good Quantity supplied the amount that sellers are willing and able to sell Supply Schedule the relationship between the price of a good and the quantity supplied Supply Curve The curve relating price and quantity supplied Law of supply and demand The price of any good adjusts to bring the quantity supplied and quantity demanded for that good into balance 3 steps to analyzing changes in equilibrium 1 Decide whether the event shift the supply or demand curve 2 Decide whether it shift to the left or right 3 Use supply demand diagram to compare the new equilibrium Supply curve unchanged Supply curve shifts to right Supply curve shifts to the left Demand curve unchanged P nothing Q D C shifts to the right P increase Q increase D C shift to left P decrease Q decrease P decrease Q increase P ambiguous Q increase P decrease Q ambiguous P increase Q decrease P increase Q ambiguous P ambiguous Q decrease