AP 9

Demand
—The desire and willingness of consumers to purchase goods or services at a given
price. It's represented by the relationship between the quantity of a product and its price.
—”Individual Demand” is the desire for a product by an individual or household.
—”Market Demand” is the total demand from all consumers in the market.
Price affects demand directly: higher prices reduce demand, while lower prices
increase it. If a product is too expensive, people won't buy much of it.

Non-price factors influencing demand include:

1. Income: When income rises, people

tend to buy more; when it falls, they
buy less.

2. Taste and Preference: People buy

more of what they like and less of
what they dislike, regardless of price
changes.

3. Population: More people mean

higher demand for products and vice
versa.

4. Price of Related Products:

—Substitutes: When the price of
one product rises, people might
switch to a cheaper substitute.

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—Complements: Goods consumed
together - when the price of one
rises, the demand for its counterpart
may fall.

5. Consumer Expectations:
Anticipating future price changes or
events can influence present
demand. For instance, if there's an
upcoming sale, people might wait to
buy, or if they expect gas prices to
rise, they might fill up their tanks
earlier.

—Shifts in the demand curve occur due to these non-price factors, causing the entire
curve to move left or right, indicating changes in quantity demanded at the same price
levels.
Demand Elasticity
—Elasticity refers to how consumers react to changes in price or income. It measures
the sensitivity of consumer behavior to these changes.
—Price Elasticity of Demand:

Examines how quantity demanded changes with price variations.

—Elastic: Quantity demanded changes significantly with price changes.
(Substitutes, luxury goods, many uses.)

—Inelastic: Quantity demanded changes slightly with price changes. (Necessities,

few substitutes, limited use.)

Formula:

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—Income Elasticity of Demand:

Measures how quantity demanded changes with changes in consumer income.

Determines normal, inferior, or luxury goods.

—Normal good(+) - A good that follows normal or average behavior: the more
money you have, the more demand for the product.

—Inferior good(-) - A good or service that you consume because it is the only thing
you can afford at this point. Given a higher income, you would choose something
else.

—Luxury good(>1) - A good that is not necessary but tends to make life more
pleasant for the consumer.
— Necessity(<1)

Formula:

—Cross-Price Elasticity:

Measures how quantity demanded of one good changes with the price change of
another good.

Determines if goods are substitutes or complements.

Formula:

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Diminishing Marginal Utility
—is how much joy or satisfaction you get from one more of something.

—Law: Says that the more you have of something, the less joy each extra one gives
you.
Supply

—Law of Supply:

As prices increase, quantity supplied also increases, and vice versa (ceteris paribus).
Producers find higher prices more profitable, leading to increased supply.
Non-price Factors Affecting Supply:

—Supply Schedule: Table displaying quantities of goods offered at different prices.

—Supply Curve: Graphical representation of the relationship between price and

quantity supplied.

—Change in Quantity Supplied: When the price changes, it causes movement along
the supply curve, affecting how much of a product producers offer.

—Change in Supply: This happens when factors other than price, like technology or
the number of producers, cause the entire supply curve to shift, changing the amount of
the product offered at all price levels.

—Non-price Factors affecting supply:

Number of Producers:

More producers increase supply; fewer decrease it.

Expectations of Price Changes:

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Producers anticipate future price changes and adjust current supply
accordingly.

Price of Related Products:

Substitutes(Competitive): Higher price for one product increases its supply,

reducing supply of others.

Complements(Joint): Increase in one product's price increases supply of related

products.

Weather:

Climate conditions affect agricultural supply, e.g., crop destruction due to

natural disasters.

Technological Improvements:

Enhancements in technology increase production efficiency, thus boosting

supply.

Market Equilibrium is when the quantity of a product that sellers are willing to sell
matches the quantity buyers are willing to buy, resulting in an agreed-upon price and
quantity.

—Equilibrium is a market condition where quantity supplied equals quantity demanded.

— Markets naturally move toward their equilibrium. It moves to a point of equilibrium

through changes in price and quantity.

—Equilibrium Price is the price level that both buyers and sellers agree to have a
transaction in the market.

—Equilibrium quantity refers to the quantity of products that buyers and sellers have
agreed to transact at a specifiedprice.

—Surplus (more supply than demand) leads to lower prices to attract buyers.

—Shortage (more demand than supply) leads to higher prices to balance demand and
supply.

Law of Supply and Demand:

If demand goes up and supply goes down, prices increase.

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If demand goes down and supply goes up, prices decrease.

Price Controls:

Government can set a maximum price (ceiling) or a minimum price (floor) to protect
consumers and sellers.

Shifts in Equilibrium:

1. Demand Increases, Supply 5. Both Supply and Demand

Unchanged: Increase:

Shortage occurs. Quantity increases, price change

is ambiguous.
Price increases, quantity
increases. 6. Both Supply and Demand
Decrease:
2. Demand Decreases, Supply
Unchanged: Quantity decreases, price change
is ambiguous.
Surplus occurs.

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Price decreases, quantity 7. Demand Increases, Supply
decreases. Decreases:

3. Supply Increases, Demand Shortage occurs, prices likely

Unchanged: increase.

Surplus occurs. Quantity change is ambiguous.

Price decreases, quantity 8. Demand Decreases, Supply

increases. Increases:

4. Supply Decreases, Demand Surplus occurs, prices likely

Unchanged: decrease.

Shortage occurs. Quantity change is ambiguous.

Price increases, quantity

decreases.

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