Unit 2: Demand and Supply Analysis – The Economic Model of Price Determination

Demand

Quantity consumers are willing and able to buy at different prices.

Law of Demand

As price rises, quantity demanded falls (inverse relationship).

Supply

Quantity producers are willing and able to sell at different prices.

Law of Supply

As price rises, quantity supplied rises (direct relationship).

Market Equilibrium

Point where quantity demanded equals quantity supplied.

Equilibrium Price (P*)

Price at which market clears.

Equilibrium Quantity (Q*)

Quantity bought and sold at equilibrium price.

Shift of Demand Curve

Change in demand due to non-price factors (income, preferences, etc.).

Shift of Supply Curve

Change in supply due to non-price factors (technology, input costs, etc.).

Price Ceiling

Maximum legal price; can cause shortage if below equilibrium.

Price Floor

Minimum legal price; can cause surplus if above equilibrium.

Shortage

Quantity demanded > Quantity supplied.

Surplus

Quantity supplied > Quantity demanded.

Labor Market Equilibrium

Wage rate where labor supplied = labor demanded.

Financial Market Equilibrium

Interest rate where funds demanded = funds supplied.

Government Intervention

Policies (ceilings/floors) affecting market efficiency and resource allocation.