Lecture 1: Supply & Demand Flashcards
The Demand Curve
Shows how much people are willing to buy/demand at
different prices; relationship between demand and price.
- LAW OF DEMAND
Shift of the demand curve
change in quantity demanded at any given price (keeping price constant)
Movement along demand curve
a change in quantity demanded due
to a change in price.
What Causes a Demand Curve to Shift?
• Changes in tastes (e.g. Rolling Stones, smartphone)
• Changes in the prices of related goods:
- Substitutes; rise in price of good 1 increases demand for
good 2 (e.g.?)
- Complements; rise in price of good 1 decreases demand
for good 2 (e.g.?)
• Changes in income:
- Normal Goods; rise in income increases demand
- Inferior Goods; rise in income decreases demand
• Changes in expectations (e.g. stock market)
• Other factors: # consumers, weather; all factors affecting
willingness to pay of consumers; see Table 3.1 book
Individual consumer surplus
net gain to an individual buyer
from the purchase of a good. It is equal to the difference between
the buyer’s willingness to pay and the price paid.
Total consumer surplus
market is the sum of the individual
consumer surpluses of all the buyers of a good.
= The total consumer surplus generated by purchases of a good at a given price is equal to the area below the demand curve but above that price.
Fall in the Price?
Increases Consumer Surplus
The Supply Curve
Shows how much people are willing to sell/supply at
different prices; relationship quantity supplied and price.
A shift in the supply curve:
change in the quantity supplied at
any given price (keeping price constant).
Movement along curve:
change in the quantity supplied as a
result of a change in the price.
What Causes a Supply Curve to Shift?
• Changes in tastes (e.g. Rolling Stones)
• Changes in input prices (less costly = more supply)
- An input is a good that is used to produce another good (e.g. airplane fuel)
• Changes in Technology- Turn inputs to output more efficiently
• Changes in Expectations
- Expect stock price to rise = less supplied
• Other: weather/climate; number of producers; factors that affect the willingness to sell/accept
(see Table 3.2)
Individual producer surplus
the net gain to a seller from
selling a good. It is equal to the difference between the price
received and the seller’s cost.
Total producer surplus
the sum of the individual
producer surpluses of all the sellers of a good.
= The total producer surplus from sales of a good at a given price is the area above the supply curve but below that price.
Rise in Price?
Increases Producer Surplus
