Section 3 - Demand and Supply

• Market


  Any situation where two parties gather to facilitate the exchange of goods and services. The parties involved are usually buyers and sellers.
• Elements of a market

  • Buyer/producers
  • Seller/consumers
  • Goods
  • Services
  • Price
• Market forces


  Supply and demand
• Demand


  An economic principle referring to a consumer's desire to purchase goods and services. The consumer is also willing to pay a price for a specific good or service.
• Supply


  A fundamental economic concept that describes the total amount of a specific good or service that is available to consumers.
• Non-price determinants of demand

  • Consumer income
  • Prices of related goods
  • Tastes
  • Expectations
  • Number of buyers
• Non-price determinants of supply

  • Number of sellers
  • Input Prices
  • Technology
  • Expectations

  
• Rules of supply and demand

  • If price increases, supply increases
  • If price decreases, supply decreases
  • If price increases, demand decreases
  • If price decreases, demand increases
  • If demand is constant and supply increases, price decreases
  • If demand is constant and supply decreases, price increases
  • If supply is constant and demand increases, price increases
  • If supply is constant and demand decreases, price decreases

  
• Supply curve


  A graphic representation of the correlation between the cost of a good or service and the quantity supplied for a given period

  
• Quantity supplied


  The amount of a good or service that sellers are willing to sell at a specific price
• The supply curve is upward sloping due to the positive/direct relationship between price and supply

  
• Change in quantity supplied


  A movement along a supply curve resulting from a change in a good's price

  
• Change in supply


  A shift in an entire supply curve resulting from a change in one of the non-price determinants of supply

  
• Supply schedule


  A table that shows the relationship between the price of a good and the quantity supplied

  
• Law of supply


  The quantity supplied of a good rises when the price of a good rises, other things being equal
• Demand curve


  A graph depicting the relationship between the price of an item and its quantity demanded

  
• Quantity demanded


  The quantity of an item that people are willing and able to purchase at a particular price at a particular point in time
• The demand curve is downward sloping due to the inverse relationship between price and demand

  
• Demand schedule


  A table that shows the quantity demanded of a good or service at different price levels

  
• Law of demand


  The quantity demanded of a good falls when the price of a good rises, other things being equal
• Ceteris paribus


  Holding all other things constant
• Equilibrium


  A state in a market-based economy in which economic forces, such as supply and demand, are balanced
• Equilibrium is the point where quantity supplied equals quantity demanded

  
• Government intervention


  Any action carried out by the government that affects the market with the objective of changing the free market equilibrium/outcome
• Price ceiling


  A government-imposed price control or price limit on how high a price is charged for a product or service
• Price floor


  A government-imposed price control or price limit on how low a price is charged for a product or service
• Disequilibrium


  Where the quantity demanded is not equal to the quantity demanded
• Elasticity


  A measure of how much buyers and sellers respond to changes in market conditions

  
• Price elasticity of demand (PED)


  A measure of how much the quantity demanded of a good responds to a change in the price of a good

  
• Calculating price elasticity of demand


  Percentage change in quantity demanded / Percentage change in price

  
• Price elasticity of demand coefficient


  The number representing the price elasticity of demand, which is always negative

  
• Degrees of elasticity


  • Perfectly inelastic
  • Inelastic
  • Unitary elastic
  • Elastic
  • Perfectly elastic
• Perfectly inelastic demand curve


  • Buyers are willing and able to pay any price for a product
• Inelastic demand curve


  • Quantity demanded is very unresponsive to changes in price

  
• Unitary elastic demand curve

  • A 10% decrease in price would lead to a 10% increase in quantity demanded, and vice versa

  
• Elastic demand curve


  • Quantity demanded is very responsive to changes in price

  
• Perfectly elastic demand curve

  • At any price above (P), quantity demanded is 0, at price (P) consumers will buy any quantity, and at a price below (P) quantity demanded is infinite

  
• Factors affecting price elasticity of demand

  • To be determined

  
• Elasticity of demand


  Measures how much quantity demanded responds to the price

  
• Degrees of elasticity of demand

  • Perfectly inelastic
  • Inelastic
  • Unitary elastic
  • Elastic
  • Perfectly elastic