EAEE238 Tutorial 1: Supply&Demand

Key terms

1. Competitive market - a market in which there are many buyers and sellers of the same good or

service, none of whom can influence the price at which the good or service is sold.

2. Demand schedule - a list or table showing how much of a good or service consumers will want to buy at different prices.

3. Demand curve - a graphical representation of the demand schedule, showing the relationship

between quantity demanded and price.

4. Quantity demanded - the actual amount of a good or service consumers are willing to buy at some

specific price.

5. Law of demand - the principle that a higher price for a good or service, other things equal, leads

people to demand a smaller quantity of that good or service.

6. Change in demand - a shift of the demand curve, which changes the quantity demanded at any

given price.

7. Movement along the demand curve - a change in the quantity demanded of a good that results

from a change in the price of that good.

8. Normal good - a good for which a rise in income increases the demand for that good - the normal

case.

9. Inferior good - a good for which a rise in income decreases the demand for the good.

10. Complements - pairs of goods for which a rise in the price of one good leads to a decrease in the

demand for the other good.

11. Substitutes - pairs of goods for which a rise in the price of one of the goods leads to an increase in

the demand for the other good.

12. Individual demand curve - a graphical representation of the relationship between quantity demanded

and price for an individual consumer.

13. Market demand curve is the horizontal sum of the individual demand curves of all consumers in the

market.

14. Supply schedule - a list or table showing how much of a good or service producers will supply at different prices.

15. Quantity supplied - the actual amount of a good or service producers are willing to sell at some

specific price.

16. Supply curve - a graphical representation of the supply schedule, showing the relationship between

quantity supplied and price.

17. Law of supply - other things being equal, the price and quantity supplied of a good are positively

related.

18. Change in supply - a shift of the supply curve, which changes the quantity supplied at any given

price.

19. Movement along the supply curve - a change in the quantity supplied of a good that results from

a change in the price of that good.

20. Input - a good or service used to produce another good or service.

21. Equilibrium - an economic situation in which no individual would be better off doing something

different.

22. Equilibrium price (market-clearing price) - the price at which the market is in equilibrium, that is, the

quantity of a good or service demanded equals the quantity of that good or service supplied.

23. Equilibrium quantity - the quantity of a good or service bought and sold at the equilibrium (or

market-clearing) price.

24. Individual supply curve - a graphical representation of the relationship between quantity supplied

and price for an individual producer.

25. Surplus - the excess of a good or service that occurs when the quantity supplied exceeds the quantity

demanded; surpluses occur when the price is above the equilibrium price.

26. Shortage - the insufficiency of a good or service that occurs when the quantity demanded exceeds

the quantity supplied; shortages occur when the price is below the equilibrium price.

EAEE238 Tutorial 1: Supply&Demand

The 5 principle factors that shift the demand curve:

1. Changes in the prices of related goods or services (substitutes vs. complements);

2. Changes in income (normal vs. inferior goods);

3. Changes in tastes (top hats, macaroons);

4. Changes in expectations (holiday sales, salary increase);

5. Changes in the number of consumers.

The 5 principle factors that shift the supply curve:

1. Changes in input prices (flour -> bread);

2. Changes in the prices of related goods and services (petroleum vs. heating oil).

3. Changes in technology (better technology reduces the cost of production).

4. Changes in expectations (bikes are more popular in summer, snowboards in winter);

5. Changes in the number of producers.

Analysing markets:

An increase in demand increases both the equilibrium price and equilibrium quantity; a decrease in

demand has the opposite effect.

An increase in supply reduces the equilibrium price and increases the equilibrium quantity; a decrease in

supply has an opposite effect.

Shifts in the curves: Shifts on the demand curve and the supply curve can happen simultaneously.

When they shift in opposite directions, the change in equilibrium price is predictable but the change in

equilibrium quantity is not.

When they shift in the same direction, the change in equilibrium quantity is predictable but the change

in equilibrium price is not.

The curve that shifts the greater distance has the greater effect on the changes in equilibrium price and

quantity.

Reference:

1. Krugman P., Wells R. (2009) "Economics", 2nd

ed.: Chapter 3 Supply and Demand.

2. http://bcs.worthpublishers.com/Krugman_AP_Econ/#t_664864____