Supply and Demand

Supply and Demand

The forces that make market economies work by determining prices and allocating scarce resources.

Competitive Market

A market with many buyers and sellers where no single entity can influence prices.

Quantity Demanded

The amount of a good buyers are willing and able to purchase.

Law of Demand

States that quantity demanded falls when the price of a good rises, assuming other factors remain constant.

Demand Curve

A graph showing the relationship between the price of a good and the quantity demanded.

Movement along the Demand Curve

Changes in quantity demanded due to price fluctuations.

Shift of the Demand Curve

Changes in quantity demanded at each price due to factors other than price.

Substitution Effect

Consumers choose cheaper substitutes when a good's price increases.

Complements

Goods for which an increase in price of one leads to a decrease in demand for the other.

Quantity Supplied

The amount of a good sellers are willing and able to sell.

Law of Supply

Quantity supplied rises when the price of a good rises, assuming other factors remain constant.

Equilibrium Price

The price where quantity supplied equals quantity demanded.

Price Elasticity of Demand

Measures how quantity demanded changes in response to price changes.

Income Elasticity of Demand

Measures how quantity demanded changes in response to changes in consumers' income.

Price Elasticity of Supply

Measures how quantity supplied changes in response to price changes.

Price elastic demand

Quantity demanded responds strongly to the change in price. Price elasticity of demand is greater than 1.

Price inelastic demand

Quantity demanded does not respond strongly to price changes and price elasticity of demand is less than 1.

Price inelastic supply

An increase in price leads to an increase in quantity supplied and it’s less than 1.