Supply and Demand
In economics, supply and demand is a model of price determination in a market.
- Demand Curve
- A curve or schedule showing the total quantity of goods that buyers want to buy at each price in a market
- Change in the quantity demanded
- A movement along the demand curve that occurs in response to a change in price
- Change in demand
- A shift of the entire demand curve (eg. an increase in income will shift the demand curve to the right)
- It is downward slopping with respect to price
- When the price is high, consumers will demand less of a good
- When the price is low, consumers will demand more of a good
Determinants of Demand
- Prices of Related Goods
- preference changes
- Number of buyers
- What effect would a news announcement indicating the health benefits of eating apples have on the apple market?
- The demand curve for apples in the market for apples will shift to the left if the price of apples increase. True or False.
- Demand curve will shift to the right because of the increase in consumer preferences
- False because price only determines the change in the quantity demand. Therefore, there will only be a leftward shift along the demand curve but the entire demand curve will not shift.
- Supply Curve
- The amount of a good that sellers are willing and able to sell
- Change in quantity supplied
- a movement along the supply curve that occurs in response to a change in price
- Change in supply
- A shift of the entire supply curve
- It is upward slopping with respect to price
- When the price is high, sellers will supply more because they can earn more in revenue
- When the price is low, sellers will supply less because they earn less in terms of revenue
Determinants of Supply
- Input costs including wages, interest rates
- Number of Sellers
- What effect would a good growing season in Hawaii have on the global market for pineapple?
- What effect would a major petroleum refinery outage in Georgia have on the market for gasoline in North America?
- The supply would shift to the right because of good growing season.
- The supply would decrease because of technological failure.
- Equilibrium (market clearing)
- Equilibrium means 'no movement', i.e. no changes in the variable of interest. A situation in which the price has reached the level where quantity supplied equals quantity demanded. In a free market, prices and quantities will keep changing until the market clears.
- Equilibrium Price
- The price that balances quantity supplied and quantity demanded
- Equilibrium Quantity
- The quantity supplied and the quantity demanded at the equilibrium price
Steps in analyzing Changes in Equilibrium
- Decide whether the event shifts the supply or the demand curve
- Decide whether the curve(s)shift(s) left or right
- Indicate the changes to the equilibrium price and quantity
Surplus and Shortage
- Surplus: Situation in which the quantity supplied is greater than the quantity demanded.
- Shortage: Situation in which the quantity demanded is greater than the quantity supplied.
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