The Law of Demand: There is an inverse relationship between price and quantity demanded.
- As price increases, quantity decreases.
- As price decreases, quantity increases.
"A change in price causes a change in quantity demanded."Causes in the change in demand:
- Change in buyers taste (advertising)
- Change in the number of buyers
- Change in income
- normal goods
- inferior goods
- Change in the price of related goods
- substitute goods
- complimentary goods
- Change in expectation (things may change)
Supply-The quantities that producers or sellers are willing and able to produce/sell at various prices.
- As price increases, quantity increases.
- As price decreases, quantity decreases.
The Law of Supply: There is an direct relationship between price and quantity supplied.
"A change in price causes a change in quantity supplied."
Causes in the change in supply:
- Change in resource (factor) price; cost of production
- Change in technology/technique
- Change in taxes or subsides (money government provides)
- Change in prices of other goods
- Change in expectation
- Change in the number of suppliers
Elasticity of Demand
-Elastic Demand
- A product is elastic when demand change greatly given a small change in price.
- Many substitutes
- Luxary Goods
- Ex. Cars, Coke/Pepsi, Steak/Chicken
- Always Greater than 1
-Inelastic Demand
- A product is said to be inelastic if the demand for it will not change or it changes very little regardless of price.
- Few Substitutes
- Necessary
- Ex. Heart medicine, Gas, Salt, Milk
- Always less than 1
-Unitary Elastic (equal to 1)
To calculate the elasticity of demand:
- Step 1: Change in Quantity= (new-old)/old
- Step 2: Change in Price= (new-old)/old
- Step 3: Change in Quantity/Change in price
Price Floor: Minimum price for a good or service
- Excess demand (shortage)
- Excess Supplied (surplus)
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