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This lecture provides some of the basic tools needed for both microeconomics and macroeconomics. You have undoubtedly heard that economics is all about supply and demand. We hope you already have some idea that economics is concerned with much broader issues, but supply and demand are two of the most important tools of economics, and an in-depth look at them will be good preparation for what is to come. In this lecture we will explore the workings of markets using supply and demand analysis. This will help us to understand how markets address the three basic economic questions: what, how, and for whom. We will also be able to analyze how markets and the people who comprise them will react to changing economic conditions and policies. Upon completion of this lecture, you should understand and be able to answer these key questions: 1. What are the basic decision-making units in the economy? 2. What are the relationships between these basic units? How does a circular flow diagram illustrate these relationships? 3. What do we mean by "quantity demanded?" What influences quantity demanded on the part of households? 4. What is the demand schedule for a product? What are the main features of a demand curve? What is the law of demand and how is it illustrated by demand curves? 5. What can change the demand for a product? How does the demand curve react to changes in demand? What do we mean by normal goods? Inferior goods? Complementary goods? Substitute goods? 6. What is the law of supply? What influences the quantity supplied of a good? What are the features of a supply curve? How do supply curves illustrate the law of supply? What factors can cause the supply of a product to change and how are these changes reflected in the supply curve? 7. What is the equilibrium price for a product? What do we mean by a shortage? A surplus? 8. How do changes in the supply or demand for a product affect its equilibrium price and quantity?
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