What dictates demand?
What the consumer is willing and able to buy
Substitution & Income effects
What is the law of demand
As P^, Q decreases, & vice versa, ceteris paribus, for normal goods, and opposite for inferior goods.
What is the substitution effect?
When P rises consumers will substitute other products for it or vice versa, for normal and inferior goods both the same.
What’s the income effect?
People have limited income so when the price of a good rises or falls it changes their purchasing power. Opposite effect on normal vs inferior goods.
What shifts the demand curve?
- Changes in buyer income
○ If it’s an inferior good, buyer income rising will actually lower the amount purchased- Change in the price of a substitute or complementary good (“associated good”)
- Consumer tastes
- Population / demographic changes
- Expected future prices
Define perfect competition
- Many buyers and sellers
- All firms sell identical products
- No barriers to new firms entering the market
What’s the law of supply?
When P ^, Q ^, ceteris paribus, & vice versa
What moves the supply curve?
Change in:
- The price of inputs
- Technology
- Prices of related goods in production
- Number of firms
- Expected future prices
What is market equilibrium?
- When the quantity supplied = the quantity demanded
- Where the supply and demand curves intersect
How do markets naturally move?
Towards equilibrium.
