Unit 2 Notes
Voluntary Exchange
 A market is created wherever a buyer and seller meet
 Both buyer and seller decide they are better off after
the transaction
 free to choose
 every time you buy something you are telling the store
you are okay with the price – dollar vote & consumer
sovereignty
Demand
willingness and ability of
consumers to purchase a good
or service;
about buying
Law of Demand
 as price rises, quantity demand decreases
 P
QD
 as price falls, quantity demand increases
P
QD
 INVERSE relationship
 quantity demanded: number you buy at a particular
price (1 product)
Demand Curve
Why the law of demand is true
 Real income effect: as prices change your ability
to buy will change; for example if the price of gas
increases you cannot buy as much with the same
amount of money
 Substitution effect: if there is a cheap alternative
people buy that instead
 Law of Diminishing Marginal Utility: the more
you have of something the less you are willing to
pay for each additional one; things get old
 a. utility means satisfaction
 b. marginal means additional or extra
Determinants of Demand: cause change in
what we demand





Population Change
Income Change
Taste or preference change
Substitute goods: something can replace another
Complementary goods: items that go together
PRICE IS NEVER THE REASON!!!
Types of Products in relation to Income
 Normal Good: the more money you make the more
you buy of these; Ex: clothes
 Inferior Goods: the more money you make the less of
these you buy; Ex: Raman noodles
 Neutral Goods: buy the same amount; Ex: toilet
paper
Elasticity of Demand
Elastic Goods
Inelastic Goods
 price change has a
large effect on the
 little change in amount
bought for any kind of
number bought;
 wants, items with
many substitutes, in
long term;
price change
 necessities, items with
no substitutes, in
short term;
 Ex: soda, new shoes, IPOD  Ex: electricity, insulin
Elasticity of Demand
 2 Types: Elastic
Follow law of
demand – P
Revenue
&
Inelastic
Breaks the law
of demand - P
Revenue
Supply
 Willingness & ability of
producers to make and
sell a product
 About selling
 Law of Supply
P
QS
P
QS
 DIRECT relationship
 Stores want profit
Supply Curve
Price
Quantity
Determinants of Supply
 # of businesses
 Taxes and subsidies = $ taken & given by gov’t
 Technology
 Price of inputs and resources
PRICE IS NEVER THE REASON!!!
Equilibrium
 Where QD = QS
 Perfect point of profit and efficiency
 Hard to reach
 Prices move to force markets to equilibrium
 Disequilibrium:
 Surplus: too much; QD < QS; P
 Shortage: run out; QD > QS; P
Equilibrium
P
D
surplus
EP
S
E
shortage
EQ
Q
Gov’t Price Controls
Price Floors
Price Ceilings
 Lowest price that can be
 Highest price that can be
charged for item
 Cause surplus b/c ppl cannot
reach equilibrium; P to high
 Bad idea/Just say no
 Ex: minimum wage
charged for item
 Cause shortage b/c ppl
cannot reach equilibrium; P
to low
 Bad idea/Just say no
 Ex: rent control in NYC
Rationing Device
 Determines who gets the goods in a FES
 Ex: Price, 1st Come, 1st Serve
 Price considered most fair
 The prices are determined by the interaction of supply
and demand