Market
whenever at least one person wants to buy a good/service and at least one other person is
willing to produce and sell that good.
Law of Demand
there is an inverse relationship between a good's price and the amount of the product that
consumers are willing to purchase, everything else held constant.
Income effect
consumers feel poorer as prices rise because they aren't able to buy as much and decrease
their purchases. One explanation for the Law of Demand
Substitution Effect
If the price of a certain good increases, consumers will begin buying more of a cheaper,
less desirable, and similar good. (ex. price of coke rises, people begin buying Pepsi).
Another explanation for the Law of Demand.
Demand
the relationship between a good's price and the quantity demanded by consumers holding
everything else that could influence consumers (income, taste, related goods, etc.)
constant.
Formula: Total Revenue Earned (TR)
Price charged * quantity sold
Change in quantity demanded
movement along the demand curve due to a change in price. This is not a change in
demand!
The demand curve
downward sloping depiction of the consumer side of the market made from connecting
quantity demanded points on the graph.
Law of Supply
low prices means a lower quantity supplied. High prices mean a higher quantity supplied.
Supply
relationship between the price of a good and the quantity supplied by a producer, all else
held constant.
Supply curve
upward sloping depiction of the production side of the market, line connecting points
corresponding to prices and quantity supplied at those prices.
Why demand slopes downward
at lower prices, consumers are more willing to purchase more and at higher prices
consumers are less willing to purchase.
Why the supply curve slopes upward
firms are more willing to produce at higher prices because they can make a higher profit
and less willing to produce at lower prices because they stand to make less profit.
excess supply (shortage of demand)
occurs when producers sell at a price too high for consumers to purchase a number of units
equal to the quantity supplied (quantity supplied is greater than quantity demanded).
Surplus signals producers to lower prices.
Supply shortage (excess demand)
occurs when prices are too low and the quantity supplied is less than the quantity
demanded. Signals to producers to increase prices.
