Economics Supply and Demand Flashcards

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Law of Demand

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When the price of a good increases, the quantity demanded decreases (and vice versa). Example: If Taco Bell lowers taco prices, quantity demanded will increase. Key Concept: Consumers look for substitutes or alternatives when prices rise.

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Determinants of Demand - Price of Related Goods

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Substitutes: Goods that can replace each other (ex: coffee & tea). If the price of coffee rises, demand for tea increases. Complements: Goods used together (ex: bagels & cream cheese). If bagel prices rise, demand for cream cheese falls (shift left).

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Determinants of Demand - Expectations

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Future events affect current demand. Example: If Tesla announces self-driving cars in 6 months, current demand for regular cars decreases.

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Law of Supply

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When the price of a good increases, the quantity supplied increases (and vice versa). Reason: Higher prices = higher profits = incentive to produce more. Example: Oil suppliers are incentivized to produce more oil when oil prices are high.

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Determinants of Supply - Taxes

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Increase costs → supply curve shifts left.

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Determinants of Supply - Technology

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Reduces costs → supply curve shifts right.

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Equilibrium

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Equilibrium Price & Quantity: Determined by both buyers and sellers. Shortage: Quantity demanded > Quantity supplied → price rises. Surplus: Quantity supplied > Quantity demanded → price falls. Example: More foreign doctors in the U.S. increases supply of healthcare → lower price, higher quantity.

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Consumer Surplus

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The difference between what a consumer is willing to pay and what they actually pay. Key Facts: It depends on price. It is never negative (you wouldn’t buy if value < price). At the market level, it’s the sum of all individual surpluses and is graphed as the area between demand curve and market price, up to Q*.

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Producer Surplus

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The difference between the price a seller receives and their cost of production. Example: Lucy sells lemonade for $3, cost = $1. Producer surplus = $2.