Market and Price

Demand

Law of demand: other things being equal, when the price of a good rises, its quantity demanded falls (and vice versa). Quantity demanded is the quantity buyers plan to buy at a price.

• A change in the good's own price → a change in quantity demanded (movement along the curve).
• A change in any other factor → a change in demand (shift of the curve):

Factor	Effect
Income ↑	Demand ↑ for a normal good; ↓ for an inferior good
Price of a substitute ↑	Demand ↑
Price of a complement (jointly demanded good) ↑	Demand ↓
Expected future price ↑	Current demand ↑
Population, preferences	Demand ↑ if they favour the good

Derived demand: the demand for a factor depends on the demand for the goods it produces (e.g. more container trade → more demand for truck drivers).

Supply

Law of supply: other things being equal, when price rises, quantity supplied rises. Supply shifts with costs of production, technology, expectations, the number of sellers, and the prices of goods in joint supply (produced together, e.g. beef and leather) or competitive supply (using the same resources).

Equilibrium

At the equilibrium price, quantity demanded = quantity supplied. Above it there is a surplus (excess supply); below it there is a shortage (excess demand). Always show changes on a demand-supply diagram.

Price elasticity of demand

$E_d = \left|\frac{\%\Delta Q_d}{\%\Delta P}\right|$

$E_d$	Demand is	If price rises, total revenue (total expenditure)
$> 1$	elastic	falls
$= 1$	unitarily elastic	is unchanged
$< 1$	inelastic	rises

Demand is more elastic when there are more close substitutes, when the good takes a larger share of income, and over a longer time.

Government intervention

• Effective price ceiling (below equilibrium): shortage, queuing and other non-price competition, possible black markets.
• Effective price floor (above equilibrium): surplus.
• Quota: limits quantity; price rises and quantity falls.
• Unit (per-unit) tax: supply shifts upward by the tax. Buyers' price rises by less than the tax; the side with the less elastic curve bears the larger share of the tax.
• Ad valorem tax: a percentage of the price.
• Subsidy: supply shifts downward; buyers and sellers share the benefit.

Common mistake: "the price of coffee rose, so the demand for coffee fell" is wrong. A change in a good's own price changes the quantity demanded, not demand.