Key Terms
Demand
The full relationship between price and quantity demanded across a range of prices; represented by the demand curve.
Price
What a buyer pays per unit of a good or service.
Law of Demand
As price rises, quantity demanded falls; as price falls, quantity demanded rises. Inverse relationship.
Demand schedule
Table version of the demand relationship.
Demand curve
Graph of the demand relationship; price on vertical axis; quantity on horizontal axis; slopes downward.
How to apply it
Analyze one factor at a time. Assume everything else is frozen.
Example
Steel prices rise. Car manufacturing costs increase.
Normal good
Demand increases when income rises; demand decreases when income falls.
Inferior good
Demand decreases when income rises; demand increases when income falls.
Substitutes
Goods that can replace each other. If the price of a substitute rises, demand for the original good increases (curve shi
Complements
Goods used together. If the price of a complement rises, demand for the paired good decreases.
Examples of complements
Cereal and milk; golf clubs and golf balls; gasoline and SUVs. If golf club prices spike, fewer clubs are bought; demand
Firms are motivated by profit
Revenue minus costs. Lower production costs mean higher profits at any given selling price.
Law of Supply
As price rises, quantity supplied rises; as price falls, quantity supplied falls. Direct relationship.
Supply curve
Graph of the supply relationship; slopes upward.