Download CHAPTER 3: Demand and Supply

CHAPTER 3: Demand and Supply (Pg. 58-73 and 76-77)
Demand (Pg. 59)
The Law of Demand (Pg. 59)
The Substitution Effect of a Change in Price on the Quantity Demanded (Pg. 59)
As the price a good rises, it become relatively more expensive and other goods become
relatively cheaper → Quantity Demanded↓
The Income Effect of a Change in Price on the Quantity Demanded (Pg. 59)
As the price a good rises, Real Income or Purchasing Power↓ → Cannot afford to buy the
same amount of the good as before the price rise → Quantity Demanded↓
Change in Demand (Pg. 60)
1. Price of Related Goods: Substitutes and Complements (Pg. 61)
Price of a Substitute Good↑ → D↑ (Shifts Right)
Price of a Complement Good↑ → D↓ (Shifts Left)
2. Income (Pg. 62)
Income↑ → D↑ (Shifts Right) for a Normal Good
Income↑ → D↓ (Shifts Left) for an Inferior Good
3. Number of Consumers (Pg. 62)
4. Preferences/Taste (Pg. 62)
5. Expected Future Income and Prices (Pg. 61-62)
6. Taxes↑ → D↓ (Shifts Left)
Change in the Quantity Demanded vs. Change in Demand (Pg. 62)
Movement along the Demand Curve (Pg. 63)
Shift of the Demand Curve (Pg. 63)
Supply (Pg. 64)
The Law of Supply (Pg. 64)
Change in Supply (Pg. 65)
1. Factor Prices (Pg. 65)
2. Price of Related Goods (Pg. 65-66)
Price of a Substitute Good↑ → S↓ (Shifts Left)
Price of a Complement Good↑ → S↑ (Shifts Right)
3. Number of Producers (Pg. 66)
4. Technology (Pg. 66)
5. Expected Future Prices (Pg. 66)
6. Taxes↑ → S↓ (Shifts Left)
Change in the Quantity Supplied vs. Change in Supply (Pg. 66)
Movement along the Demand Curve (Pg. 66-67)
Shift of the Supply Curve (Pg. 66-67)4
Market Equilibrium (Pg. 68)
At Market Equilibrium, (1) The Demand Curve meet the Supply Curve, (2) Quantity
Demanded = Quantity Supplied, and (3) there is no pressure on the price to change.
2
When P > Equilibrium Price → QD < QS → Excess Supply (Surplus) → Pressure on price to
go down to Equilibrium Price.
When P < Equilibrium Price → QD > QS → Excess Demand (Shortage) → Pressure on price
to go up to Equilibrium Price.
Changes in Price and Quantity (Pg. 70)
Change in Demand (Pg. 70)
D↑ (Shifts Right) → P↑ and Q↑
D↓ (Shifts Right) → P↓ and Q↓
Change in Supply (Pg. 71)
S↑ (Shifts Right) → P↓ and Q↑
S↓ (Shifts Right) → P↑ and Q↓
Change in Demand and Supply (Pg. 72)
D↑ and S↑ → P? and Q↑
D↑ and S↓ → P↑ and Q?
D↓ and S↑ → P↓ and Q?
D↓ and S↓ → P? and Q↓
Mathematical Note (Pg. 76-77)
Demand Curve: P = a - b QD
Supply Curve: P = c + d QS
Market Equilibrium: QD = QS = Q