Cheat Sheet

The following summary should help you with questions that ask for knowledge about a change in demand and supply:

Market Effects of Changes in Demand

A. Change in Quantity Demanded Versus Change in Demand: A change in a variable other than the price causes a change in demand. A change in the price of the good itself causes a change in quantity demanded.

B. Increases in Demand

1. An increase in income

a. Normal goods are goods for which an increase in income increases demand.

b. Inferior goods are goods for which a decrease in income increases demand.

2. A change in the price of a related good

a. If the price of a substitute good rises, demand will increase.

b. If the price of a complementary good falls, demand will increase.

3. An increase in demand causes excess demand at the original price.

4. Excess demand causes the price to increase, and thus the quantity demanded falls along the demand curve and quantity supplied increases along the supply curve, until a new equilibrium is reached (at a higher price and quantity).

C. Decreases in Demand

1. A decrease in income

a. Normal goods are goods for which a decrease in income decreases demand.

b. Inferior goods are goods for which an increase in income decreases demand.

2. A change in the price of a related good

a. If the price of a substitute good falls, demand will decrease.

b. If the price of a complementary good rises, demand will decrease.

3. A decrease in demand causes excess supply at the original price.

4. Excess supply causes the price to decrease, and thus the quantity demanded rises along the demand curve, and quantity supplied falls along the supply curve, until a new equilibrium is reached (at a lower price and quantity).

Market Effects of Changes in Supply

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A. Change in Quantity Supplied Versus Change in Supply: A change in a variable other than the price causes a change in supply. A change in the price of the good itself causes a change in quantity supplied

B. Increases in Supply

1. A decrease in input costs

2. An advance in technology

3. An increase in the number of producers

4. Expectations of lower future prices

5. Subsidy (or a decrease in taxes)

C. Decreases in Supply

1. An increase in input costs

2. A decrease in the number of producers

4. Expectations of higher future prices

5. Taxes

“Original document by Peter Turner licensed CC BY”