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.

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.

• 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

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.

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.

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Income & Price of Goods• A rise in income causes an increase

in demand.• Superior Goods or Normal Goods• Inferior Goods• Substitute Good• Complimentary Good

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.

The Supply Curve• Determinants of Supply:

• Resource Prices

• Technology

• Taxes & Subsidies

• Prices of other goods

• Price Expectations

• # of sellers in the market

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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.

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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