1. Demand and Supply Krugman Section Modules 5-7

2. Demand demand is a schedule that shows the various amounts of a product consumers are WILLING and ABLE to BUY at each specific price at a specific time. demand is a schedule that shows the various amounts of a product consumers are WILLING and ABLE to BUY at each specific price at a specific time.

3. Demand Schedule: listing that shows the # demanded at different prices Demand Schedule: listing that shows the # demanded at different prices Demand Schedule for Donuts Price Quantity $21 $1.505 $1.008 $.7512 $.5015 $.2525

4. Demand Curve: the schedule on a graph Demand Curve: the schedule on a graph See graph on document manager See graph on document manager

5. Law of Demand There is an inverse relationship between price & quantity demanded There is an inverse relationship between price & quantity demanded –If p , D  –If p , D 

6. Substitution Effect: a lower price gives an incentive to substitute the lower-priced good for the higher priced good Substitution Effect: a lower price gives an incentive to substitute the lower-priced good for the higher priced good

7. Marginal Utility: Marginal Utility: Extra satisfaction from getting one more unit of a product Diminishing marginal utility: the extra satisfaction we get from one more unit begins to diminish Diminishing marginal utility: the extra satisfaction we get from one more unit begins to diminish

8. Demand Curve Always Downward sloping—indicating lower quantity demanded at higher prices, higher quantities at lower prices Always Downward sloping—indicating lower quantity demanded at higher prices, higher quantities at lower prices Change in PRICE reflects movement along the curve = change in quantity demanded Change in PRICE reflects movement along the curve = change in quantity demanded

9. If a change in demand is NOT caused by a change in PRICE, the entire curve will shift = change in demand If a change in demand is NOT caused by a change in PRICE, the entire curve will shift = change in demand

10. Determinants that affect demand (other than price) Consumer tastes Consumer tastes # of buyers # of buyers Income Income Prices of related goods Prices of related goods –Substitute goods –Complementary goods Expectations Expectations

11. Demand Schedule for Donuts Price Quantity1Quantity2 $213 $1.5057 $1.00812 $.751220 $.501525 $.252535 Demand has increased so the curve has shifted to the right.

12. Supply Supply is a schedule that shows the amount of a product a producer is WILLING and ABLE to produce and SELL at each specific price at a specific time. Supply is a schedule that shows the amount of a product a producer is WILLING and ABLE to produce and SELL at each specific price at a specific time.

13. Law of supply Producers will produce & sell more of their product at a high P than at a low P. Producers will produce & sell more of their product at a high P than at a low P. There is a direct relationship in P & Q supplied There is a direct relationship in P & Q supplied –If P , S will  –If P , S will 

14. Explanation of the Law of Supply Given product costs, a higher P means greater profits and thus an incentive to increase the Q supplied. Given product costs, a higher P means greater profits and thus an incentive to increase the Q supplied.

15. Supply Curve Upward sloping— indicating higher Qs supplied at higher P, lower Qs at lower P Upward sloping— indicating higher Qs supplied at higher P, lower Qs at lower P Supply Schedule for cakes P (Price) Q (Quantity) $3025 $2520 $2018 $1514 $1010 $51

16. Change in PRICE reflects movement along the curve = change in quantity supplied Change in PRICE reflects movement along the curve = change in quantity supplied If a change in supply is NOT caused by a change in PRICE, the entire curve will shift = change in supply If a change in supply is NOT caused by a change in PRICE, the entire curve will shift = change in supply

17. Determinants that affect supply (other than price) Resource prices*** Resource prices*** Technology Technology Taxes (-) or subsidies (+) Taxes (-) or subsidies (+) Price of related goods Price of related goods Expectations Expectations Number of sellers Number of sellers

18. Supply Schedule for cakes PriceQ1Q2 $302520 $252015 $201810 $15148 $10105 $510

19. Market Equilibrium Quantity supplied = quantity demanded Quantity supplied = quantity demanded –Where the two curves intersect Prices above equilibrium = surplus of supply Prices above equilibrium = surplus of supply Prices below equilibrium = shortage of supply Prices below equilibrium = shortage of supply Market Clearing or Market Price is another name for equilibrium Market Clearing or Market Price is another name for equilibrium

20. Graphson Document Camera or Board Surplus Shortage Price ceiling Price floor Shifts