Outline

I.      The Law of Demand

        A.      The law of demand holds that other things being equal, a rise in the price of a 
                good leads to a decrease in the quantity demanded, and a fall in the price of a 
                good leads to an increase in the quantity demanded.
                        
                1.      Quantity demanded is the amount of a good that consumers wish to buy at a particular price.
                2.      A demand schedule is a table showing the relationship between the price 
                        of a good and the quantity demanded per period of time, other things equal.
                3.      A demand curve is a diagram showing the relationship between the price 
                        of a good and the quantity demanded per period of time, other things equal.
                B.      While demand curves are frequently drawn as straight lines for simplicity, they are often curved in reality.

II.     Shifts in the Demand Curve

        A.      The demand curve is drawn on the assumption that all relevant factors remain constant.
        B.      A shift in demand, resulting from changes in income, expectations, or some other 
                relevant factor that had been assumed to remain constant, creates a new demand cuve.
        C.      Income
                1.      A normal good is a good for which demand increases in response to an increase in income.
                2.      An inferior good is a good for which demand falls in response to a higher price.
        D.      Prices of Substitutes
                1.      Substitute goods are goods that are substitutable in consumption.
                2.      Two goods are substitutes when an increase in the price of one good increases the demand for the other.
        E.      Prices of Complements
                1.      Complementary goods are goods that are consumed together.
                2.      Two goods are complements when an increase in the price of one good reduces the demand for the other.
        F.      Number of Potential Buyers
        G.      Tastes
        H.      Expectations

III.    Distinguishing Between Changes in Demand and Changes in the Quantity Demanded

        A.      A change in demand refers to a shift in the demand curve--the relationship between price and quantity demanded has been modified.
        B.      A change in quantity demanded refers to a movement along an existing demand curve.

IV.     The Law of Supply

        A.      The law of supply holds that other things being equal, a higher price for a good increases the quantity supplied; a lower price reduces the quantity supplied.
                1.      The quantity supplied refers to the amount of a good that firms wish to sell at a particular price.
                2.      A supply schedule is a table showing the relationship between the price of a good and the quantity supplied per period of time, other things 
                        equal.
                3.      A supply curve is a diagram showing the relationship between the price of a good and the quantity supplied per period of time, other things 
                        equal.
        B.      A change in price leads to a movement along the supply curve; a change in any other determinant of supply creates a new supply curve.


-V.     Shifts in Supply

        A.      Costs of Production
                1.      Production costs may be affected by changes in input prices, taxes, and technology.
                2.      Should production costs rise, supply tends to fall; should production costs fall, supply tends to rise.
        B.      Prices of Other Goods the Firm Could Produce
        C.      Expectations of Producers

VI.     The Interaction of Supply and Demand

        A.      Shortage is the amount by which quantity demanded exceeds quantity supplied at a given price, a situation that exists when price is below the equilibrium price.
        B.      Surplus is the amount by which quantity supplied exceeds quantity demanded at a given price, a situation that exists when price is above the equilibrium price.

VII.    Equilibrium

        A.      The equilibrium price is the price for which the quantity demanded equals the quantity supplied.
        B.      Equilibrium is the state of balance that exists when the quantity demanded in a market equals the quantity supplied.

VIII.    Disequilibrium

        A.      Any price for which quantity demanded and quantity supplied diverge is called a disequilibrium price.
        B.      In restricted, competitive markets, disequilibrium prices cannot be maintained.
        C.      As demand or supply changes, the market moves to its new equilibrium.

IX.     Changes in the Equilibrium Price

        A.      A Change in Demand
                1.      An increase in demand leads to an increase in both the equilibrium price and quantity.
                2.      A decrease in demand causes a decrease in both the equilibrium price and quantity.
        B.      A Change in Supply
                1.      An increase in supply depresses price while putting an upward pressure on quantity.
                2.      A decrease in supply raises the equilibrium price and reduces the equilibrium quantity.
        C.      A Change in Both Demand and Supply
                1.      When both supply and demand increase, equilibrium quantity rises while the equilibrium price may rise, fall, or remain constant according to 
                        the relative change in supply and demand.
                2.      When demand and supply curves shift in opposite directions, the effect on price is clear, but the effect on quantity will depend upon the 
                        relative magnitude of changes in supply and demand.
                        a.      An increase in demand coupled with a decrease in supply raises the equilibrium price.
                        b.      A decrease in demand coupled with an increase in supply pushes the equilibrium price lower.

X.      Price Controls

        A.      A price ceiling is the maximum legal price that may be charged for a product.
        B.      A price floor sets the minimum legal price that must be paid for a product.

XI.     Price Ceilings

        A.      A price ceiling set above the equilibrium price has no impact.
        B.      A price ceiling set below the equilibrium price tends to create a shortage.
        C.      If consumers are willing to pay more than the legal price, and suppliers are 
                willing to break the law to earn extra profits, a black market develops.

XII.    Price Floors

        A.      A price floor set below the equilibrium price has no impact.
        B.      A price floor set above the equilibrium price tends to create a surplus.