Chapter 3: Supply and Demand

Factor Market:

Any place where factors of production (land, labor, capital, and entrepreneurship) are bought and sold.

Product Market:

Any place where finished goods and services (products) are bought and sold.

Supply( Sellers)

• Ability to produce (do they have workers, materials, machines?)

• Willingness to produce (is it worth it / profitable?)

Demand ( Buyers)

• Ability to buy (do they have the money?)

• Willingness to buy (do they actually want it?)

Relationship between demand and price( Ceteris Paribus)

Price ↑ → Demand ↓

Demand between price and supply

Price ↑ → Supply ↑

Determinants of demand

• Tastes (desire for this and other goods)

• Income (of the consumer)
• Other goods (their availability and price)

• Expectations (for income, prices, tastes)

• Number of buyers

Changes in quantity demanded:

Movements along a given demand curve in response to changes in price.

Changes in demand:

Shifts of the demand curve due to changes in tastes, income, other

goods, or expectations.

Market Supply

Market supply is the total amount of a product that all sellers in a market are willing and able to sell at different prices during a certain time period, assuming everything else stays the same.

Law of demand

When the price of something goes down, people usually buy more of it.
When the price goes up, people usually buy less of it.

Law of supply

When the price of something goes up, sellers will supply more of it.
When the price goes down, sellers will supply less of it.

What is equilibrium?

Equilibrium is the “perfect match” price where:

• buyers are happy with how much they’re buying
  AND

• sellers are happy with how much they’re selling

Equilibrium Price

The equilibrium price occurs at the intersection of the supply and demand curves.

• There is only one equilibrium price.

• The market will naturally move toward this price.

Market surplus

The amount by which the quantity supplied exceeds the quantity demanded at a given price.
* Occurs when the selling price is higher than the equilibrium price.
* Sellers supply more than buyers demand at the current price.

Price Celling

A price ceiling is a legal maximum price.

Price floor

A price floor is a legal minimum price.