# By: George Daoud B7

```By: George Daoud
B7
#17- Substitute vs. Complimentary
Goods
Substitute- Goods which, as a result of changed conditions, may
replace each other in use or consumption.
Ex. Classic examples of substitute goods include margarine and
butter, tea and coffee. One good can be substituted for another, the
demand for the two kinds of good will be bound together by the fact
that customers can trade off one good for the other if it becomes
Complimentary- A good with a negative cross elasticity of demand.
This means a good's demand is increased when the price of another
good is decreased.
Ex. An example of this would be the demand for hotdogs and hotdog
buns. If the price of hotdog buns were to decrease by some amount,
this would result in a higher quantity of hotdogs demanded.
#18- Law of Supply
A law stating that, all other things unchanged, an
increase in price results in an increase in quantity
supplied.
Ex. This means that producers are willing to offer
more products for sale on the market at higher prices
by increasing production as a way of increasing
profits.
If ten people want to buy an apple, and there's only
one apple, the sale will be based on the level of
demand for the apple. The supply function requires
more apples, which generates more production to
meet demand.
#19- Supply Curve (Schedule)
A supply schedule is a table that shows the relationship between the
price of a good and the quantity supplied. Firms will produce
additional output as long as the cost of producing an extra unit of
output is less than the price they will receive.
Ex. The price of oranges increases, the quantity supplied of oranges
then increases. This kind of behavior on the part of sellers is in
accordance with the law of supply.
#20- Determinates of Supply
1) Technology changes
-Technology aids a producer in minimizing his cost of production; mass
production is possible with technology.
2) Resource supplies
-The producer also has to pay for other resources such as raw materials and
labor. If his money is short on supplying a certain number of products
because of an increase in resource supplies, then he has to reduce his supply.
3) Tax/ Subsidy
-A producer aims to minimize his profit, but an increase in tax will only
increase his expenses, decreasing his capacity to buy resource supplies and
forcing him to reduce his supply.
4) Price of other goods produced
-A producer may not only produce on product but other products as well. A
producer's money is limited and if he increases his supply in one product, he
would have to decrease his supply in the other product, not unless his sales
increase.
#21- Market Equilibrium vs. Market
Disequilibrium
ME- A situation in which the supply of an item is exactly equal to its
demand. Since there is neither surplus nor shortage in the market,
price tends to remain stable in this situation.
Ex. When the supply and demand curves intersect, the market is in
equilibrium.
MD- This is when the demand and supply curve is not crossing. This
can mean supply is less than demand or vice versa. In a market where
supply is less than demand the price of goods and services eventually
will go up until demand is less and the market is in equilibrium. In a
market where there is an oversupply of goods and services the price
eventually will go down until demand curve cross the supply curve.
Ex. The inherent tendency to change occurs because a surplus causes
the price to decline and a shortage causes the price to rise.
#22- Shortage vs. Surplus
A shortage exists at a market price when the quantity demanded exceeds
the quantity supplied.
Ex. Excess demand for a product
A surplus exists at a market price when the quantity supplied exceeds the
quantity demanded.
Ex. Excess supply for a product
#23- Consumer Surplus vs. Producer
Surplus
CS- The difference between the total amount that consumers are willing and able
to pay for a good or service and the total amount that they actually pay.
Ex. Man wants to buy an apple, stand sells for 35 cents, he’s willing to buy at 50
cents, consumer surplus is 15 cents.
PS- The difference between what producers are willing and able to supply a good
for and the price they actually receive. The level of producer surplus is shown by
the area above the supply curve and below the market price.
Ex. Man values CD at \$2, his friend values it at \$10. The man sells it to his friend
for \$5, and gains a consumer surplus of \$3.
#24- Elasticity (Elastic vs. Inelastic)
Elastic- A type of demand that will rise or fall depending on the price of the
good.
Ex. If the price of candy is around \$1, most people will buy the candy and it
will be high in demand. However, if that same candy bar's price rose up to
\$4, most people would not buy the candy.
Inelastic- People will buy goods with an inelastic demand no matter what
the price is.
Ex. People complain about gas prices, yet they still buy it because they need
it, even if it \$3 or \$4 a gallon.
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