Section 2 Review

Summary

Demand

• 1. The supply and demand model illustrates how a competitive market, one with many buyers and sellers of the same product, works.
• 2. The demand schedule shows the quantity demanded at each price and is represented graphically by a demand curve. The law of demand says that demand curves slope downward, meaning that as price decreases, the quantity demanded increases.
• 3. A movement along the demand curve occurs when the price changes and causes a change in the quantity demanded. When economists talk of changes in demand, they mean shifts of the demand curve—a change in the quantity demanded at any given price. An increase in demand causes a rightward shift of the demand curve. A decrease in demand causes a leftward shift.
• 4. There are five main factors that shift the demand curve:
  • A change in the prices of related goods, such as substitutes or complements
  • A change in income: when income rises, the demand for normal goods increases and the demand for inferior goods decreases
  • A change in tastes
  • A change in expectations
  • A change in the number of consumers

Supply and Equilibrium

• 5. The supply schedule shows the quantity supplied at each price and is represented graphically by a supply curve. Supply curves usually slope upward.
• 6. A movement along the supply curve occurs when the price changes and causes a change in the quantity supplied. When economists talk of changes in supply, they mean shifts of the supply curve—a change in the quantity supplied at any given price. An increase in supply causes a rightward shift of the supply curve. A decrease in supply causes a leftward shift.
• 7. There are five main factors that shift the supply curve:
  • A change in input prices
  • A change in the prices of related goods and services
  • A change in technology
  • A change in expectations
  • A change in the number of producers
• 8. The supply and demand model is based on the principle that the price in a market moves to its equilibrium price, or market-clearing price, the price at which the quantity demanded is equal to the quantity supplied. This quantity is the equilibrium quantity. When the price is above its market-clearing level, there is a surplus that pushes the price down. When the price is below its market-clearing level, there is a shortage that pushes the price up.

Changes in Equilibrium

• 9. An increase in demand increases both the equilibrium price and the 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 the opposite effect.
• 10. Shifts of the demand curve and the supply curve can happen simultaneously. When they shift in opposite directions, the change in price is predictable but the change in quantity is not. When they shift in the same direction, the change in quantity is predictable but the change in price is not. In general, the curve that shifts the greater distance has a greater effect on the changes in price and quantity.