Notesale: Turn your study into money

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Supply and Demand
Demand
- The quantity of goods or service that buyers or consumers are willing and able to buy at
a given price and over a given period of time
Law of Demand:​ there is an inverse relationship between a product’s quantity demanded and its
price, assuming other things do not change, demand curve always slopes downward in most
cases
- If price increases, quantity demanded decreases
- If price decreases, quantity demanded increases

Supply
- The quantity of the product that businesses are willing to put on the market at various
prices during a given period of time
Law of Supply:​ there is a direct relationship between a product’s quantity supplied and its price,
assuming other things do not change, supply curve always slopes upward in most cases
- If price increases, quantity supplied increases
- If price decreases, quantity supplied decreases

Equilibrium:​ The point at which the supply and demand curve meet, the compromise between
the consumer and the producer

Factors That Affect Demand (Can Cause the Curve to Shift)

Supply and Demand
Number of Buyers
- If the number of buyers increases, demand will increase
- If the number of buyers decrease, demand will decrease
Consumer Income
- If consumer income increases, demand will increase
- If consumer income decreases, demand will decrease
Tastes and Preferences Change
- Consumer fads and tastes may change which can cause the demand for a product to
increase or decrease depending if the fad is in your favour
Expectations of Future Prices
- If future prices are expected to rise, current demand for the product will increase
- If future prices are expected to fall, current demand for the product will decrease
Prices of Related Products
- Substitute products are those that can replace the original good, if the substitute price
decreases demand for the original decreases
- Complementary goods are those that go hand in hand, for example, if the demand for
skis increases, then the demand for ski boots will also naturally increase
Factors That Affect Supply (Can Cause the Curve to Shift)
Number of Producers
- If the number of producers increases, supply will increase
- If the number of producers decrease, supply will decrease
Production Costs
- If production costs increase, supply will decrease
- If production costs decrease, supply will increase
State of Technology
- If technology becomes more efficient, supply will increase
- If technology becomes less efficient, supply will decrease
Change in Nature and Environment
- Sometimes natural disasters can cause destruction, resulting in a decrease in supply
- Sometimes the environment can change for the better, resulting in an increase in supply
Producer Expectations
- If the price of another produced good increases, the supply for the original good
decreases
- If the price of another produced good decreases, the supply for the original good
increases

Shifts vs Movement Along the Curve

Supply and Demand
Supply vs Quantity Supply
Demand vs Quantity Demand
-

-

Changed in Demand or Supply cause a shift in the curve
These shifts are caused by the factors that affect supply and demand
Price of the good or service is the only factor that cannot shift the curve
A change in solely price will cause movement along the current supply or demand curve,
which can also be known as an increase or decrease in quantity supplied or quantity
demanded
A change in price will never cause a shift but instead will cause the current point to move
up or down the current curve

Simultaneous Shifts
Price

Quantity

Supply Increase, Demand Decrease

Decrease

?

Supply Decrease, Demand Increase

Increase

?

Supply Increase, Demand Increase

?

Increase

Supply Decrease, Demand Decrease

?

Decrease

Variations of the Curve

Supply and Demand
Giffen Good:​ ​a good for which demand increases as the price increases, and falls when the
price decreases,​ ​typically an inferior product that does not have easily available substitutes
- An example would be cheaper staple foods such as beans, rice, and pasta, whose
demand is driven by poverty that makes their purchasers unable to afford superior foods
Veblen Good:​ ​A good for which demand increases as the price increases, because of its
exclusive nature and appeal as a status symbol
- Rolls Royce cars have trademark luxuries that make them veblen goods
Fixed Demand:​ Price remains irrelevant as the quantity demanded will always be the same
Supply and Demand Externalities
Externality:​ costs/benefits of a product that are incurred by a third party, not the consumer or
producer​, referred to as spillover effects
Positive Externality:​ benefits that are enjoyed by the third party, other than the producer or
consumer
- Examples include; ​the government pays for free education but society benefits because
there are more educated people, education, charity
- With positive externalities and when external benefits are ignored, an underproduction of
the product occurs and there is an underallocation of resources
- A demand-side market failure: demand curve fails to include the external benefits
incurred by the good (the value of the positive impact of the bystanders)
- Merit Goods:​ goods through their consumption exhibit positive externalities
Negative Externality:​ costs that are incurred by the third party, other than the producer or
consumer
- Examples include; the environment suffers when a furniture company cuts down trees
for wood, pollution, drunk driving, resource depletion
- When negative externalities exist and when external costs are ignored, there is an
overproduction of the product that occurs and there is an overallocation of resources
- Producers and consumers do not take into account the costs imposed on others
Social Costs and Benefits
Social Cost:​ private costs incurred by the decision made + any external costs
- Social Cost = Private Cost + External Cost
Social Benefits:​ private benefits received by the decision maker + any external costs
- Social Benefit = Private Benefit + External Benefit
-

Private costs refer to the supply curve
Private benefits refer to the demand curve

Floors, Ceilings, Subsidies, Quotas, and Excise Tax

Supply and Demand
Price Floor:​ ​A price floor is a government or group-imposed price control or limit on how low a
price can be charged for a product
...
Usually causes a surplus of goods
...
Price ceilings only become a problem when they are set below the
market equilibrium price
...

- For example, the government imposes a price ceiling on the rent price for low income
properties
- This helps those who are on low income renting these houses
- Does not favour the producer, or in this case, the landlords

Subsidies:​ money provided by the government to producers or consumers of a specific product

Supply and Demand
-

Supply increases by the amount of the subsidy, quantity sold also increases
Both the consumer and producer benefit
Downfall is that taxpayers use their tax dollars to fund this subsidy and there is no
incentive to increase producer efficiency

Quotas:​ a limit on the quantity of a good that can be produced and sold
- Supply is reduced causing a higher equilibrium price
- Quantity sold decreases
- Has the effect of increasing income while avoiding the surplus problem
- Downfall is the fact that they are limiting production

Excise Tax:​ a government imposed tax on a particular good or service
- Excise tax raise price equally across all points on the supply curve
- Supply shifts to the left by the amount of the excise tax
- The producer increases sale price to counteract taxes but this causes a surplus, which
causes producers to lower price, meaning they will lose money per sale
- This causes both the consumer and producer to lose

Elasticity
Elasticity:​ the degree to which changes in prices and incomes affect supply and demand

Supply and Demand
-

Elasticity refers to the degree of responsiveness in supply or demand in relation to a
change in price
Price Elasticity of Demand:​ the extent to which consumers and the quantity they demand
respond to a change in price

-

-

If a curve is more elastic, than small changes in price will cause large changes in
quantities demanded and supplied
If a curve is less elastic, then it will take large changes in price in order to influence a
change in quantity demanded or supplied

​When E=<1: Inelastic
When E=1: Unitary
When E=>1: Elastic

Price Change

Qd Change

Revenue Change

Elastic

UP

DOWN

DOWN

Elastic

DOWN

UP

UP

Inelastic

UP

DOWN

UP

Inelastic

DOWN

UP

DOWN

Determinants of Elasticity of Demand
Availability of Substitutes
- The more substitutes that are available, the more elastic the good or service is
% of Income Spent on the Commodity
- The more that is spent on the good or service, the more elastic it becomes
Time Period Since the Price Change
- The longer the time since the price change, the more elastic the good or service is
Degree of Necessity (Addiction, Habit)
- The less of a necessity the good or service is, the more elastic is becomes

Income Elasticity

Supply and Demand
Income (Consumer) Elasticity:​ The responsiveness of demand to changes in incomes

-

​When Y=<1: Inelastic
When Y=1: Unitary
When Y=>1: Elastic

-

For a normal good, as income rises so does demand
For an inferior good, as income rises demand falls

-

A positive sign denotes a normal good (Example: Automobiles = +3
...
20)

Cross Elasticity
- The responsiveness of demand of one good to change in the price of a related good,
either a substitute or a complement

-

Goods which are complementary will have a negative sign (inverse relationship between
the two)
Goods which are substitutes will have a positive sign (positive relationship between the
two)

Price Elasticity of Supply

Supply and Demand
Elasticity of Supply:​ The responsiveness of the quantity supplied by a seller to a rise or fall in
price
Determinants of Elasticity of Supply
Time
- The longer the time period a seller has to increase production, the more elastic the
supply will be
The Presence of Unused Capacity
- If a company has extra employees on hand, they can quickly respond to an increase in
price causing them to produce more, making it more elastic
The Presence or Absence of Closer Producer Substitutes
- If a company is specialized in producing a certain good, they are more inelastic when it
comes to switching to a different good to produce
The Ability to Store Stocks of Goods
- When companies have a great ability to store their product, the supply is more elastic
because they can ride out a decrease in price



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