Demand and Supply
What is the law of demand?
As price increases, demand decreases and vice versa.
What is the equilibrium price on a supply and demand curve?
Where the two lines intersect.
An increase in supply or demand will cause the curve to shift what direction?
A decrease will cause the curves to shift what direction?
Right
Left
What perspective are we taking with supply?
What perspective are we taking with demand?
Supplier
Consumer
Give an example of an inelastic good.
Gasoline
What is the law of supply?
As price increases, supply increases.
As price decreases, supply decreases.
What is a fad?
What determinant of demand does it represent?
A temporary high interest in a good that doesn't last.
Tastes and preferences.
What does ceteris paribus mean?
All else remains constant.
This means that we only take into consideration a price change and not the determinants.
What is the difference between the substitution effect and complimentary goods?
With the substitution, you buy an entirely different good.
With complimentary items, you buy goods that go together.
What is the difference between a market demand schedule and an individual demand schedule?
Individual is for one person while the market is for all buyers.
What are the 5 determinants of demand?
1. Consumer income
2. Price of related goods
3. Tastes and preferences
4. Expectations
5. Number of buyers in the market
The price of ice cream cones increases.
How does this effect the sale of ice cream and what is this an example of?
Sales for ice cream drop. Complimentary items.
What does elasticity mean?
How sensitive the demand for a good is when there is a price change.
As a business owner, why is it important to understand how supply and demand work together.
You want to set the price to equal the demand for a good. This will help you to avoid a surplus/shortage.
How does the income effect change demand for a good?
The lower the price, the richer you will feel and vice versa.
In 2020, stimulus checks caused people to buy more goods. What is this an example of?
The income effect.
Where do they fall on a supply and demand curve?
Surplus: supply exceeds demand for a good (above)
Shortage: demand exceeds the supply for a good (below)
Define the difference and give an example of a price floor and price ceiling.
Where do they fall on a supply and demand curve?
Price floor is the lowest you can legally go in price (minimum wage) while a price ceiling is the highest you can legally go in price (rent control).
Price ceiling is below the equilibrium while price floor is above the equilibrium.
What are the five determinants of supply?
1. Change in price of related goods
2. Change in expectations
3. Change in technology
4. Number of producers
5. Change in expectations
What is the difference between a "change in quantity demanded" and a "change in demand?"
Point to point on the same line
A whole line shift