Demand and Supply Study Notes

Definition: States that, all else being equal, as the price of a good decreases, the quantity demanded increases, and vice versa.
Demand Curve: Typically slopes downward from left to right, indicating an inverse relationship between price and quantity demanded.
Factors Influencing Demand:
- Income Level: Higher income increases demand for normal goods, decreases for inferior goods.
- Consumer Preferences: Changes in tastes can shift demand.
- Prices of Related Goods:
  - Substitutes: Price increase of one good increases demand for another.
  - Complements: Price increase of one good decreases demand for another.

Definition: As the price of a good increases, the quantity supplied also increases, and vice versa.
Supply Curve: Typically slopes upward from left to right, indicating a direct relationship between price and quantity supplied.
Factors Influencing Supply:
- Production Costs: Decreases in costs increase supply.
- Technology: Improved technology can enhance supply.
- Number of Sellers: More sellers in the market increase overall supply.

Demand Shift: Occurs when the entire demand curve moves due to changes in non-price factors.
- Rightward Shift: Increase in demand (e.g., increased consumer income, favorable change in preferences).
- Leftward Shift: Decrease in demand (e.g., decrease in consumer income, unfavorable change in preferences).
Supply Shift: Occurs when the entire supply curve moves due to changes in non-price factors.
- Rightward Shift: Increase in supply (e.g., reduced production costs, increased number of sellers).
- Leftward Shift: Decrease in supply (e.g., increased production costs, labor strikes).

Price Elasticity of Demand (PED): Measures the responsiveness of quantity demanded to a change in price.
- Elastic Demand: PED > 1 (demand changes significantly with price changes).
- Inelastic Demand: PED < 1 (demand changes little with price changes).
- Unitary Elastic Demand: PED = 1 (demand changes proportionately with price changes).
Price Elasticity of Supply (PES): Measures the responsiveness of quantity supplied to a change in price.
- Elastic Supply: PES > 1 (supply changes significantly with price changes).
- Inelastic Supply: PES < 1 (supply changes little with price changes).
- Unitary Elastic Supply: PES = 1 (supply changes proportionately with price changes).

Definition: The point where the quantity demanded equals the quantity supplied.
Equilibrium Price: The price at which the market clears, meaning there is no surplus or shortage.
Graphical Representation:
- The demand and supply curves intersect at the equilibrium point.
Changes in Equilibrium:
- If demand increases, the equilibrium price and quantity will rise.
- If supply increases, the equilibrium price may fall while equilibrium quantity rises.
Surplus and Shortage:
- Surplus: Occurs when quantity supplied exceeds quantity demanded at a given price.
- Shortage: Occurs when quantity demanded exceeds quantity supplied at a given price.

Definition: Describes the inverse relationship between price and quantity demanded.
Demand Curve: Slopes downward, indicating that as price decreases, quantity demanded increases.
Factors Influencing Demand:
- Income Level: Higher income leads to increased demand for normal goods and decreased demand for inferior goods.
- Consumer Preferences: Change in tastes for a particular good shifts demand curve.
- Prices of Related Goods:
  - Substitutes: An increase in the price of one good leads to an increase in demand for its substitute.
  - Complements: An increase in the price of one good leads to a decrease in demand for its complement.

Definition: Describes the direct relationship between price and quantity supplied.
Supply Curve: Slopes upward, indicating that as price increases, quantity supplied increases.
Factors Influencing Supply:
- Production Costs: Lower production costs lead to an increase in supply.
- Technology: Technological advancements can increase efficiency, thus increasing supply.
- Number of Sellers: More sellers in the market, meaning an increase in supply.

Demand Shift: The entire demand curve moves due to changes in non-price factors.
- Rightward Shift: Increase in demand (e.g., increased consumer income, favorable shift in preferences).
- Leftward Shift: Decrease in demand (e.g., decrease in consumer income, unfavorable shift in preferences).
Supply Shift: The entire supply curve moves due to changes in non-price factors.
- Rightward Shift: Increase in supply (e.g., reduced production costs, increased number of sellers).
- Leftward Shift: Decrease in supply (e.g., increased production costs, labor strikes).

Price Elasticity of Demand: Shows how much the quantity demanded changes in response to a price change.
- Elastic Demand: The quantity demanded changes significantly when price changes (PED > 1).
- Inelastic Demand: The quantity demanded changes very little when price changes (PED < 1).
- Unitary Elastic Demand: The quantity demanded changes proportionally to the price change (PED = 1).
Price Elasticity of Supply: Shows how much the quantity supplied changes in response to a price change.
- Elastic Supply: Quantity supplied changes significantly when price changes (PES > 1).
- Inelastic Supply: Quantity supplied changes very little when price changes (PES < 1).
- Unitary Elastic Supply: Quantity supplied changes proportionally to the price change (PES = 1).

Definition: Point where quantity demanded and quantity supplied are equal.
Equilibrium Price: The price that clears the market, meaning there's no surplus or shortage.
Graphical Representation:
- The point where the demand and supply curves intersect.
Changes in Equilibrium:
- Increased Demand: Equilibrium price and quantity rise.
- Increased Supply: Equilibrium price may fall, while equilibrium quantity rises.
Surplus and Shortage:
- Surplus: Occurs when quantity supplied exceeds quantity demanded at a given price.
- Shortage: Occurs when quantity demanded exceeds quantity supplied at a given price.