Chapter 2: Supply and Demand
1. The Law of Demand
● Definition: As the price of a good or service decreases, the quantity demanded
increases, and vice versa — ceteris paribus (all other things equal).
● Demand Curve: Downward sloping, showing the inverse relationship between price and
quantity demanded.
Key Concepts:
● Quantity Demanded: The amount of a good consumers are willing and able to buy at a
specific price.
● Change in Quantity Demanded: Movement along the demand curve due to a change in
price.
● Change in Demand: A shift of the entire demand curve due to a non-price factor.
2. Determinants of Demand (Demand Shifters)
These factors cause the entire demand curve to shift:
1. Income
○ Normal goods: Demand increases as income increases.
○ Inferior goods: Demand decreases as income increases.
2. Tastes and Preferences
○ Favorable trends increase demand; unfavorable trends decrease it.
3. Prices of Related Goods
, ○ Substitutes (e.g., Coke vs. Pepsi): If the price of one increases, demand for the
other increases.
○ Complements (e.g., coffee and cream): If the price of one increases, demand for
the other decreases.
4. Expectations
○ If consumers expect future prices to rise, current demand increases.
5. Number of Buyers
○ More consumers in the market increase demand.
3. The Law of Supply
● Definition: As the price of a good or service increases, the quantity supplied increases,
and vice versa — ceteris paribus.
● Supply Curve: Upward sloping, showing the direct relationship between price and
quantity supplied.
Key Concepts:
● Quantity Supplied: The amount of a good that sellers are willing and able to sell at a
specific price.
● Change in Quantity Supplied: Movement along the supply curve due to a change in
price.
● Change in Supply: A shift of the entire supply curve due to a non-price factor.
4. Determinants of Supply (Supply Shifters)
These factors shift the entire supply curve:
1. Input Prices
1. The Law of Demand
● Definition: As the price of a good or service decreases, the quantity demanded
increases, and vice versa — ceteris paribus (all other things equal).
● Demand Curve: Downward sloping, showing the inverse relationship between price and
quantity demanded.
Key Concepts:
● Quantity Demanded: The amount of a good consumers are willing and able to buy at a
specific price.
● Change in Quantity Demanded: Movement along the demand curve due to a change in
price.
● Change in Demand: A shift of the entire demand curve due to a non-price factor.
2. Determinants of Demand (Demand Shifters)
These factors cause the entire demand curve to shift:
1. Income
○ Normal goods: Demand increases as income increases.
○ Inferior goods: Demand decreases as income increases.
2. Tastes and Preferences
○ Favorable trends increase demand; unfavorable trends decrease it.
3. Prices of Related Goods
, ○ Substitutes (e.g., Coke vs. Pepsi): If the price of one increases, demand for the
other increases.
○ Complements (e.g., coffee and cream): If the price of one increases, demand for
the other decreases.
4. Expectations
○ If consumers expect future prices to rise, current demand increases.
5. Number of Buyers
○ More consumers in the market increase demand.
3. The Law of Supply
● Definition: As the price of a good or service increases, the quantity supplied increases,
and vice versa — ceteris paribus.
● Supply Curve: Upward sloping, showing the direct relationship between price and
quantity supplied.
Key Concepts:
● Quantity Supplied: The amount of a good that sellers are willing and able to sell at a
specific price.
● Change in Quantity Supplied: Movement along the supply curve due to a change in
price.
● Change in Supply: A shift of the entire supply curve due to a non-price factor.
4. Determinants of Supply (Supply Shifters)
These factors shift the entire supply curve:
1. Input Prices
