Understanding Demand and Supply in Economics

Chapter 1 & Chapter 2

◦The production possibilities curve shows the maximum quantity of goods and services that can be produced when the existing resources are used fully and efficiently.

Chapter 3

Demand Curve/ Supply Curve

1. Movement along the curve (Change of Quantity Demanded/ Quantity Supplied): Price of this product (Demand Law / Supply Law)

• Demand is the amount of a product that people are willing and able to purchase at each possible price during a given period of time.
• The quantity demanded is the amount of a product that people are willing and able to purchase at one, specific price.

Law of Demand

As price of a good rises, consumers buy less. As price of a good falls, consumers buy more. Depicts the inverse quantity-price relationship with all else assumed to be constant.

Law of Supply

As the price of a product rises, producers will be willing to supply more, and vice versa. The height of the supply curve at any quantity shows the minimum price necessary to induce producers to supply that next unit to market. The height of the supply curve at any quantity also shows the opportunity cost of producing the next unit of the good.

Shift of Demand/Shift of Supply

Shift of demand factors

• Number of buyers
• Consumer income: If income goes up, demand goes up. If income goes down, demand goes down. It depends on the good. Normal good: Income goes up, demand goes up. Inferior good: Income goes up, demand goes down.
• Tastes and preferences
• Demographics
• Price of related goods: Substitutes and Complimentary good
• Expectations

Shift of supply factors

• Prices of related good and services
• Resource prices
• Expectation of producers
• Number of producers
• Technology and productivity

Equilibrium

Equilibrium is the price and quantity at which the quantity supplied and the quantity demanded are equal. A market is said to be in disequilibrium at all points at which the quantities demanded and supplied are not equal. Shortage or Surplus, how the market will adjust it

◦A surplus occurs whenever Qs>Qd. A shortage occurs whenever Qd>Qs. Surpluses and shortages can be resolved with price changes.

Chapter 4

Private Sector vs. Public Sector

◦Private Sector

• Households: one or more persons who occupy a unit of housing. Household spending is called consumption.
• Business Firms: A business firm is a business organization controlled by a single management.
• International Firms and Consumers

Industrial Countries have high per capita incomes. The economies of the industrial nations are highly interdependent. Developing Countries have low per capita incomes. Developing countries greatly outnumber industrial countries.

◦Public Sector

• Government: Government in the U.S. exists at the federal, state, and local levels. Net Exports=Exports-Imports. Trade Surplus/ Deficit: Trade surplus and trade deficit.

Chapter 5

What is GDP?

◦Gross Domestic Product (GDP) is the market value of final goods and services produced within a country during a specific time period, usually a year. Three Methods to measure GDP:

1. GDP as output: Q1*P1+Q2*P2
2. GDP as expenditure: GDP=Consumption Spending+ Gross Investment +Gov’t. spending+ (Exports-Imports)
3. GDP as income. Nominal GDP vs. Real GDP

◦Nominal GDP is a measure of national output based on the current prices of goods and services. Real GDP is a measure of the quantity of final goods and services produced, obtained by eliminating the influence of price changes from nominal GDP statistics. Types of price indexes: Consumer Price Index (CPI), Producer Price Index (PPI), GDP Deflator (GDP Price Index or GDPPI)

Chapter 6

Calculating reciprocal exchange rate: US $1 per pound=1.64. When a currency appreciates/depreciates and how it impacts demand for goods/services in a country. Exchange rate import and exports. Appreciation of CAD and Depreciation of CAD.