The Law of Demand
There is an inverse relationship between price and quantity demanded
What are the 3 reasons for the Law of Demand?
Substitution Effect, Income Effect, Law of Diminishing Marginal Utility
Substitution Effect
Changes in price motivate consumers to buy relatively cheaper substitute goods
Income Effect
Changes in price affect the purchasing power of consumer’s income
Law of Diminishing Marginal Utility
As you continue to consume a given product, you will eventually get less additional utility (satisfaction) from each unit
What are the 5 shifters of demand?
Tastes/Preferences, Number of consumers, Price of Related Goods, Income, Expectations
The Law of Supply
There is a direct relationship between price and quantity supplied
What are the 5 shifters of Supply?
Price of Resources, Number of Producers, Technology, Taxes & Subsidies, Expectations
Equilibrium
Quantity demanded equals quantity supplied
Surplus
Quantity supplied is greater than quantity demanded
Shortage
Quantity demanded is greater than quantity supplied
Supply
the amount of a good or service that is produced
Demand
the amount of good or service that consumers want
Quantity Supplied
the amount of something that producers are willing to sell at a certain price
Quantity Demanded
the amount of something that consumers are willing to buy at a certain price
As supply goes up, the supply curve shifts to the _______________________, and the price goes ____________________.
right, down
As supply goes down, the supply curve shifts to the _______________________, and the price goes ____________________.
left, up
As demand goes up, the demand curve shifts to the _______________________, and the price goes ____________________.
right, up
As demand goes down, the demand curve shifts to the _______________________, and the price goes ____________________.
left, down
Supply Shock
occurs when there's a sudden shortage of some good