Information from SparkNotes.com Supply and Demand

Demand Law of demand: The quantity demanded rises as price falls (for normal goods), other things being constant. Demand curve: A graphical representation of the law of demand. It slopes downward. Movements along the demand curve: A change in price is represented by movements along the demand curve; demand is still the same, but the quantity demanded changes as the price changes. Shifts in demand curve: The demand curve will shift to the left or right when anything other than the price of the good has changed. Such factors include: changes in income, changes in the price of substitute or complement goods, changes in tastes and desires, and changes in expectations about your future income or future price levels. The market demand curve is the horizontal sum of all individual demand curves.

Shifts in Demand Here are some things that would cause the demand curve to shift: 1. A change in income for the average consumer. If an increase in income causes an increase in the demand for a particular good, that good is called a "normal" good. Example: steak. If an increase in income causes a decrease in the demand for a particular good, that good is called an "inferior" good. Example: red beans. 2. A change in the population. 3. Changes in the prices of other goods. Complements. Substitutes. 4. Changes in consumer tastes.

Supply Law of supply: The quantity supplied rises as price rises, other things being constant. Supply curve: A graphical representation of the law of supply. It slopes upward. Movements along the supply curve: A change in price is represented by movements along the supply curve; supply is still the same, but the quantity supplied changes as the price changes. Shifts in supply curve: The supply curve will shift to the left or right when anything other than the price of the good has changed. Such factors include: changes in prices of inputs used in production, changes in technology, changes in supplier expectations about future prices, and changes in taxes and subsidies. The market supply curve is the horizontal sum of all individual supply curves.

Market Equilibrium and the Invisible Hand The invisible hand theory states that prices will adjust to achieve equilibrium; this pricing mechanism coordinates individuals’ decisions so that scarce resources can be put to their best possible use. When quantity supplied exceeds quantity demanded (surplus), prices tend to fall. When quantity demanded exceeds quantity supplied (shortage), prices tend to rise. When the quantity demanded equals the quantity supplied, prices have no tendency to change and the market is in equilibrium.

Equilibrium continued FIGURE Above Equilibrium occurs at the price where quantity supplied is equal to quantity demanded.

Equilibrium Cont. Shifting the supply curve to the right (left) causes the equilibrium price to fall (rise) and the equilibrium quantity to rise (fall). Shifting the demand curve to the right (left) causes the equilibrium price to rise (fall) and the equilibrium quantity to rise (fall).

Government Involvement in Market Equilibria Price floor: A government-imposed limit on how low a price can be (e.g., the minimum wage). Price ceiling: A government-imposed limit on how high a price can be (e.g., rent control). Taxes, tariffs, and quotas Excise (sales) tax: A tax levied on a specific good at the time it is purchased. Income tax: A tax on income. It may be proportional, progressive, or regressive, depending on whether the tax rate stays the same, increases, or decreases as income increases. Tariff: A tax on imports. Taxes and tariffs raise prices and reduce quantity. Quota: A limit on how much of a good can be imported or sold in a particular country.

Complementary Goods Goods that go together… complement one another. The price and supply of one will affect the demand of the other Example: Hot Dogs and Hot Dog Buns which are complementary goods Food Lion runs a "special" on hot dog buns---we can predict that customers will want to buy more hot dogs than they otherwise would at whatever is the posted price of hot dog –because the total price for a hot dog on a bun will be cheaper--- leading consumers to consume more of both products.

Substitute Goods These are goods that can replace one another. The demand for one will usually affect the demand for the other. When you think of substitute goods—think alternatives. Example: Coke and Pepsi If Food Lion is running a sale on 12 packs of Coke products, then more people will buy Coke over Pepsi.

Complementary vs. Substitutes

Elastic Demand Elastic Demand is used to describe a change in demand when a price changes (responsiveness) The demand for a good would be called elastic if the price changed and made the demand for the good change. Example… You love Diet Coke but if the price went up to $5 per can, the demand would be elastic because you would be unwilling to buy one can of Diet Coke for $5.

Inelastic Demand Inelastic Demand refers to the fact that there is no change when price changes. A good would be inelastic if people still wanted the item even when the price goes up. A great example of this is Christmas trees or Thanksgiving Turkeys. People will continue to buy either of these during the holiday season no matter the price because it is tradition to have them…demand does not change.