2. Main Definitions Market: –All situations that link potential buyers and potential sellers are markets. Demand: –A demand schedule shows price and quantity demanded for a particular good. The demand schedule alone does not indicate the price of a particular good.

3. Law of Demand All else equals, as price falls, the quantity demanded rises, and as price rises, the quantity demanded falls. Ex: Sales!! People buy more of a product at a low price than at a high price.

4. Income effect: lower prices increase the purchasing power of a buyers money income. Substitution Effect: purchase products that are a lower price as to substitute products that are now at higher prices Income & substitution effect combine to make consumers willing and able to buy more of a product at lower prices Income & Substitution Effect

5. The Demand Curve Determinants of Demand: –Consumers’ tastes/preferences –# of consumers in the market –Consumer’s Incomes –Price of Related Goods –Consumer Expectations about future prices and incomes.

6. Change in Demand A change in one or more of the determinants of demand will change the demand curve. An increase in demand will shift the curve to the right. A decrease in demand will shift the curve to the left. → ←

7. Income & Price of Goods A rise in income causes an increase in demand. Superior Goods or Normal Goods Inferior Goods Substitute Good Complimentary Good

8. Law of Supply As price rises the quantity supplied rises, and as price falls the quantity supplied falls (direct effect). Ex: GMC will supply more cars at higher prices than at lower prices. To suppliers, price represents REVENUE.

9. The Supply Curve Determinants of Supply: Resource Prices Technology Taxes & Subsidies Prices of other goods Price Expectations # of sellers in the market ← →

10. Market Equilibrium Excess supply = surpluses Excess demand = shortages When neither one of these exist than the price is at equilibrium. Equilibrium = “market- clearing” price Equilibrium quantity: quantity supplied & demanded are equal. ← ↑ ↓ →

11. Price Ceilings & Price Floors Price Ceiling –The maximum legal price a seller may charge for a product Price Floor –A minimum price fixed by the government