Supply and Demand

Demand

Supply

Equilibrium

Q* (equilibrium quantity)

Ceteris paribus: nothing else changes.

A price change in one shifts demand for the other.

Both rise.

A shortage.

Surplus

Price elasticity of demand

Higher prices make it worth producing more, so the supply curve slopes upward.

A change in quantity demanded is a movement along the demand curve, caused only by the good's own price. A change in demand is a shift of the whole curve, caused by anything else.

Tastes and preferences Prices of related goods (substitutes and complements) Income Number of buyers Expectations about future prices or income

Input (resource) prices Technology Taxes and subsidies Number of sellers Producer expectations Prices of other goods the firm could produce

Demand for a normal good rises when income rises. Demand for an inferior good falls when income rises, as with instant noodles or bus rides.

It increases (shifts right), because tea is a substitute for coffee.

It decreases (shifts left), because gasoline and SUVs are complements.

Demand today increases (shifts right) as people buy before the price goes up.

Price falls and quantity rises.

Both fall.

Price rises and quantity falls.

Quantity rises; the change in price is indeterminate (it depends on which shift is bigger).

Price rises; the change in quantity is indeterminate.

Supply shifts right (increases), so price falls and quantity rises.

Supply shifts left (up by the amount of the tax): the price buyers pay rises, quantity falls and some deadweight loss is created.

Supply shifts right: price falls and quantity rises.

Rent control is a common ceiling; the minimum wage is a common floor.

A surplus: quantity supplied is greater than quantity demanded. With the minimum wage, the surplus is unemployment.

Below the equilibrium price. A ceiling above equilibrium is non-binding and changes nothing.

Shortage

A shortage pushes the price up; a surplus pushes it down. Either way the market moves toward equilibrium.

Quantity demanded changes by a larger percentage than the price (elasticity greater than 1), usually because there are many substitutes.