ECON1101 Study Guide - Final Guide: Ceteris Paribus, Economic Equilibrium, Demand Curve
The Supply and Demand Model
Demand
• Demand schedule - a tabular presentation of demand showing the P and Q demanded for a
particular good, ceteris paribus.
• Law of demand – P increases → Q decreases.
• Demand curve - downward-sloping.
• *The demand curve also indicates the willingness to pay, i.e. the highest price that will be paid
for the last unit purchased.
• A change in the price of the good, (which means QD changes) leads to a movement along the
curve.
• A change in demand caused by any non-price factors shift the curve.
• An increase in demand shifts the demand curve to the right, whereas a decrease in demand
shifts to the left.
• Reasons for demand curve shifts:
➢ Changes in tastes, preferences and information.
➢ Changes in income – if income increases, the sales of normal goods will increase, but
the same of inferior/generic goods decrease.
➢ Changes in price of closely related goods
a) Substitute goods - price of X rises, demand for Y increases.
b) Complementary goods – price of X rises, demand for Y decreases.
➢ Changes in number of consumers in the market
➢ Chages i cosuers’ expectatios of the future – eg: demand increases if people
expect the future price of the good to rise.
Supply
• Supply schedule - a table of prices (P) and quantity supplied (Qs) for a good at different
prices, ceteris paribus.
• Law of supply – P increases → Q increases (positively related).
• Supply curve - upward-sloping, (the supply curve refers to all the firms producing the
product).
• A change in the price of the good itself leads to movement along the supply curve.
• A shift occurs if a change is caused by any non-price factors, eg: weather.
• Reasons for supply curve shifts:
➢ Change in technology – anything that changes Q of outputs for a given amount of
inputs, eg: weather.
➢ Change in price of inputs – eg: raw materials, labour.
➢ Change in no. of firms in market – if no. of firms increases then supply increases.
➢ Changes in expectations for future prices – eg: Valetie’s Day: plan for roses to
bloom in Feb.
➢ Changes in gov. taxes, subsidies and regulations:
o Taxes increase firms' costs → reduce supply.
o Subsidies (payments to firms from gov.) reduce firms' costs → increase supply.
o Regulations change firms' costs of production or their ability to produce goods.
Market Equilibrium: Combining Supply and Demand
• Shortage/excess demand - QD > QS→ price rises.
• Surplus/excess supply – QS > QD → price falls.
• Equilibrium price – the price in which QS = QD.
• Equilibrium quantity – the quantity traded at the equilibrium price.
• Market is in equilibrium when QD = QS and the price is stable.
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Document Summary
Changes in income if income increases, the sales of normal goods will increase, but the same of inferior/generic goods decrease. Changes in price of closely related goods: substitute goods - price of x rises, demand for y increases, complementary goods price of x rises, demand for y decreases. Changes in number of consumers in the market. Cha(cid:374)ges i(cid:374) co(cid:374)su(cid:373)ers" expectatio(cid:374)s of the future eg: demand increases if people expect the future price of the good to rise. Supply: supply schedule - a table of prices (p) and quantity supplied (qs) for a good at different prices, ceteris paribus. Change in technology anything that changes q of outputs for a given amount of inputs, eg: weather. Change in price of inputs eg: raw materials, labour. Change in no. of firms in market if no. of firms increases then supply increases. Changes in expectations for future prices eg: vale(cid:374)ti(cid:374)e"s day: plan for roses to bloom in feb.
