Chapter Three: Module Summary -- Supply and Demand

• There is no "Law of Supply and Demand." There are two separate laws: the Law of Supply and the Law of Demand.

• The Law of Demand holds that other things equal, as the price of a good or service rises, its quantity demanded will fall, and vice versa.

• A Demand Curve is a graphical depiction of the law of demand. It has a negative slope.

• The Law of Supply holds that other things equal, as the price of a good or service rises, its quantity supplied will rise, and vice versa.

• A Supply Curve is a graphical depiction of a supply schedule plotting price on the vertical axis and quantity supplied on the horizontal axis. The supply curve is upward-sloping.

• Equilibrium occurs at the price in which quantity demanded equals quantity supplied.

• A Shortage occurs when quantity demanded exceeds quantity supplied.

• A Surplus occurs when quantity supplied exceeds quantity demanded.

• A change in price results in a movement along a fixed demand curve. A change in any variable other than price that influences quantity demanded produces a shift in the demand curve.

• A shift in the demand curve to the right (left) results in a higher (lower) equilibrium price and quantity.

• Substitutes are goods that can be consumed in place of one another. Complements are goods that are typically consumed together.

• The demand curve shifts to the right when incomes rise, population increases, preferences increase, the price of a substitute rises, or the price of a complement falls.

• A change in price results in a movement along a fixed supply curve. A change in any other variable that influences quantity supplied produces a shift in the supply curve.

• A shift in the supply curve to the right (left) results in a lower (higher) equilibrium price and a higher (lower) equilibrium quantity.

• The supply curve shifts to the right if the cost of inputs falls, technology increases, or the size of the industry increases.

• A Price Ceiling is a legal maximum that can be charged for a good. The outcome is a shortage.

• A Price Floor is a legal minimum that can be charged for a good. The outcome is a surplus.