Jim Whitney Economics 101

Supply and Demand: Recap

Supply Demand
Definition: the relationship between various prices and quantities that producers offer to sell. Definition: the relationship between various prices and quantities that consumers offer to buy.
Benefit-cost rule: Sell another unit if the price you receive for it exceeds or at least covers your marginal cost (MC) of producing it. Benefit-cost rule: Buy another unit if its marginal benefit (MB) to you exceeds or at least covers the price you pay for it.
2 ways to look at S:
   (i) given any P, distance out S tells us Qs
  (ii) given any Q, distance up to S tells us the unit's supply price (Ps), which equals its marginal cost.		 2 ways to look at D:
   (i) given any P, distance out D tells us Qd
  (ii) given any Q, distance up to D tells us the unit's demand price (Pd), which equals its marginal benefit.
Key properties: 
    (1) lurking behind every supply  curve are  opportunity costs
    (2) supply curves usually slope up 
    (3) price steers production of an item to its lowest-cost providers.		 Key properties: 
    (1) lurking behind every demand curve are  benefits 
    (2) demand curves always slope down (the "law of demand") 
    (3) price steers consumption of an item to its highest-valued uses.
What causes a movement along S (ex: from a to b in the figure below)? A change in the price received by sellers (Ps) What causes a movement along D (ex: from a to b in the figure below)? A change in the price paid by buyers (Pd)
What causes a shift of supply (ex: from S to S' in the figure above)? Changes in... 
    (1) technology 
    (2) input prices 
    (3) the number of sellers 
    (4) expectations
 		 What causes a shift of demand (ex: from D to D' in the figure above )? Changes in... 
    (1) tastes and preferences 
    (2) income (higher income raises demand for normal goods and lowers demand for inferior goods) 
    (3) prices of related goods (demand increases when the price of a substitute rises and decreases when the price of a complement rises) 
    (4) number of buyers
    (5) expectations