Demand shifts: Tastes, Related goods, Income, Buyers (number of), Expectations. Supply shifts: Prices of inputs, Expectations, Number of sellers, Technology, Subsidies/taxes.
T
Tastes/preferences change
R
Related goods prices (substitutes/complements)
I
Income of consumers
B
Buyers — number of consumers in market
E
Expectations of future prices
PENTS
Supply: Input Prices, Expectations, Number of sellers, Technology, Subsidies
📊 Supply & Demand
Movement ≠ Shift
Movement Along vs Shift of Curve
The most common source of confusion in supply & demand
A change in PRICE causes a movement along the curve (no shift). A change in any other factor causes the entire curve to SHIFT. Price → movement. Anything else → shift.
📊 Supply & Demand
Surplus → price falls. Shortage → price rises.
Market Self-Correction
How markets return to equilibrium automatically
Surplus (Qs > Qd): too much supply, sellers lower price until equilibrium. Shortage (Qd > Qs): too little supply, buyers bid up price until equilibrium.
📊 Supply & Demand
Demand down-slope, Supply up-slope
Curve Directions
Which direction each curve slopes — and why
Demand curves slope downward: higher prices → fewer buyers. Supply curves slope upward: higher prices → more sellers willing to produce. Remember: D down, S up.
Price floors and ceilings — which creates surplus, which creates shortage
Price floor (min price) set above equilibrium → suppliers produce more than demanded → surplus. Price ceiling (max price) set below equilibrium → demand exceeds supply → shortage.
Market Equilibrium
Equilibrium: where supply meets demand. Price adjusts until quantity supplied = quantity demanded.
Market Equilibrium
How markets find their natural resting point
At equilibrium price: no surplus (excess supply) and no shortage (excess demand). If price is above equilibrium → surplus → sellers lower price. If below → shortage → sellers raise price. Markets naturally gravitate toward equilibrium when allowed to adjust freely.
Supply Elasticity
Elasticity of supply: how much quantity supplied responds to price changes. Time matters — longer time = more elastic.
Supply Elasticity
Producers become more flexible over longer time periods
Short run: supply is relatively inelastic — hard to quickly change production capacity. Long run: more elastic — can build new factories, train workers. Perfectly inelastic supply: fixed quantity regardless of price (land, original Picasso paintings).
Surplus Areas
Consumer and producer surplus: CS = area above price, below demand curve. PS = area below price, above supply curve.
Surplus Areas
Visualizing who gains from market transactions
Consumer surplus: difference between what consumers are willing to pay and what they actually pay — area above price line and below demand curve. Producer surplus: difference between price received and minimum acceptable price — area below price line and above supply curve. Total welfare = CS + PS.
How the price of one good affects demand for another
Substitutes: price of Pepsi rises → demand for Coke rises (positive cross-price elasticity). Complements: price of printers falls → demand for ink cartridges rises (negative). Used by businesses to understand competitive and complementary relationships.
Black Markets
Black market: when price controls prevent legal transactions, illegal markets emerge at market-clearing prices
Black Markets
The predictable result of price controls held below equilibrium
Price ceiling creates a gap between supply and demand → someone will supply illegally at higher prices. Drug prohibition, ticket scalping, foreign currency black markets. Governments must enforce heavily to prevent — and enforcement has its own costs.
Income and Substitution Effects
Income effect vs substitution effect: price rise → can afford less (income) AND switch to cheaper alternatives (substitution)
Income and Substitution Effects
Two reasons why quantity demanded falls when price rises
When the price of a good rises: Substitution effect — it's now relatively more expensive than alternatives, so consumers substitute away. Income effect — real purchasing power falls, so consumers buy less of everything. Both effects cause quantity demanded to fall.