Macroeconomics Unit I: Demand and Supply

DEMAND AND SUPPLY

Demand Schedule

• We survey individuals as to what prices they are willing to buy donuts for, and we notice a trend. 

         Ex. A trend that we can notice is that...as price increases, the quantity demanded                                 decreases (inversely related). If the price of ice cream cones increases, less people will                  buy ice cream cones, which makes the quantity of cones demanded to decrease.

Demand Curve

• This shows the relationship between price and quantity demanded on a graph.
• Downward slope
• ONLY USE POINTS GIVEN. DO NOT MAKE UP YOUR OWN.
• INCREASE in demand will cause the curve to shift to the RIGHT.
• DECREASE in demand will cause the curve to shift to the LEFT.

Ex. 

Demand is...

• The quantities that people are willing to purchase at various prices.

The Law of Demand

• There is an inverse relationship between price and quantity supplied.

Ex. If the price of carrots increases, less people will buy carrots, meaning the demand will                     decrease.

What causes a "change in quantity demanded"?  (ΔQD) (Δ=CHANGE)

• Δ in price

What causes a "change in demand"? (ΔD)

• Δ in buyer’s taste
• Δ in # of buyers
• Δ in income (two types):

                                            Normal: goods that buyers buy more of when their income rises

                               Inferior: goods that buyers buy less of when their income rises

• Δ in price of related goods (two types):

·                                                             Substitute: goods that serve roughly the same purpose to buyers

·                                                             Complimentary: goods that are often consumed together

• Δ in expectations

Supply Schedule

• We notice that in the yard market, the more yards being tended means there will be an increase of price with each yard being added.

         Ex. A trend that we can notice is that...as price increases, the quantity supplied                                   increases (directly related). As the quantity supplied of lemonade increases, the                              price increases.

Supply Curve

• This shows the relationship between price and quantity supplied on a graph.
• Upward slope
• ONLY USE POINTS GIVEN. DO NOT MAKE UP YOUR OWN.

Ex. 

Supply is...

• The quantities that producers or sellers are willing and able to produce/sell at various quantities.

The Law of Supply

• There is a direct relationship between price and quantity supplied.

Ex. If the quantity supplied of flower bouquets increases, the price will increase. The more                     flower bouquets being supplied, the higher the price will be. 

What causes a "change in quantity supplied"?  (ΔQS) (Δ=CHANGE)

• Δ in price

What causes a "change in supply"? (ΔS)

• Δ in weather
• Δ in technology
• Δ in cost of production
• Δ in # of sellers
• Δ in taxes or subsidies
• Δ in expectations

SUPPLY RELATED TERMS, SYMBOLS, AND FORMULAS

Related Terms

Marginal Revenue

• Additional income of selling one more unit of a good.

Marginal Cost

• Cost of producing one more unit of a good.

Fixed Cost

• Cost that does not change, no matter how much is produced.

Ex. rent, mortgage, and insurance

Variable Cost

• Cost that fluctuates.

Ex. gas, electricity, and cell phone bills

Symbols

• Q                                        Quantity
• TFC                                    Total Fixed Cost
• TC                                      Total Cost
• MC                                      Marginal Cost
• AFC                                    Average Fixed Cost
• AVC                                    Average Variable Cost
• ATC                                    Average Total Cost
• TR                                      Total Revenue

Formulas

• TR = (PRICE)(Q)
• MC = (NEW TC) - (OLD TC)
• ATC = AFC+AVC (OR) TC/Q
• TC = TFC+TVC 
• AFC = TFC/Q
• AVC = TVC/Q

RELATIONSHIP BETWEEN DEMAND & SUPPLY

Shortage

• QD>QS

Surplus

• QD<QS

Equilibrium

• Point in which demand and supply curves intersect.
• All resources are being efficiently used.

Price Floor

• Government imposed price limit on how low a price can be charged for a product.
• Protects businesses

Ex. minimum wage

Price Ceiling

• Government imposed limit on how high a price can be charged for a product.
• Protects consumers

Ex. rent control