Economics Chapter on Supply and Demand

Chapter 3: Demand, Supply, and Price

• This chapter examines the forces that determine market prices.
• It describes how quantity demanded and supplied are related to price, and how changes in these variables affect equilibrium price.
• Quantity demanded refers to the total amount of a good that consumers wish to purchase during a particular time period. It's a flow, distinct from the stock (amount available).
• Quantity bought (or exchanged) represents actual purchases.
• Quantity demanded is inversely related to price (ceteris paribus). Several products can often fulfill the same need, so a lower price for one product encourages its greater consumption.
• Factors that influence quantity demanded beyond price include consumer income, prices of other goods, consumer preferences, population, and significant changes in weather.
• A change in any of these factors (apart from price) causes a shift in the demand curve. A shift is distinct from a movement along the curve, which involves responding to a price change. A shift in the curve represents a change in quantity demanded at every price.
• Quantity supplied represents the total amount of a product that firms wish to sell during a period. It's also a flow, differentiated from the amount available. Quantity supplied is positively related to price (ceteris paribus). Producers seek profit, so higher prices encourage more supply.
• Factors that influence quantity supplied beyond price include technology, government taxes/subsidies, prices of other products, significant weather changes, and the number of suppliers.
• A change in any of these factors (apart from price) causes a shift in the supply curve. A shift is distinct from a movement along the curve, which involves responding to a price change. A shift in the curve represents a change in quantity supplied at every price.
• Market equilibrium occurs when quantity demanded equals quantity supplied. Any price above or below this equilibrium price will result in either excess supply (price too high) or excess demand (price too low).
• Equilibrium price helps balance supply and demand levels.
• Changes in demand or supply affect equilibrium price and quantity. Shifts in the curve indicate a change of supply or demand, different from a change in quantity.
• These shifts might be prompted by numerous factors.
• The theory of supply and demand may have limitations in specific market situations. For example, markets with few consumers or producers, or where the product being traded is not standardized, may exhibit non-typical behaviors. The model is useful for many consumer products, though.
• Absolute pricing refers to the exact price of a product. Relative pricing defines the price in terms of other goods. Demand and supply graphs usually depict relative pricing.