Lesson 3: Supply and Demand & Changes in Equilibrium (ECON-221)

Demand

the relationship between the price of a certain good or service and the quantity of that good or service someone is willing and able to buy

Law of Demand

the common relationship that a higher price leads to a lower quantity demanded of a certain good of service and a lower price leads to a higher quantity demanded, while all other variables are held constant

Supply

the relationship between the price of a certain good or service and the quantity of that good or service producers are willing to offer for sale

Law of Supply

the common relationship that a higher price leads to a higher quantity supplied of a certain good or service and a lover price to a lower quantity supplied, while all other variables are held constant

Determinants of Supply and Demand

Price is most important

Supply: Input prices, production alternatives, technology, expectation of future prices, natural events, number of sellers, government intervention

Demand: Consumer income, consumer preferences, number of buyers in the market, prices of related goods, expectation of future prices

Ceteris paribus

When changing one variable in a function (e.g. demand for some product), we assume everything else held constant

Market Equilibrium

price and quantity combination where supply equals demand

Surplus

situation where the quantity demanded in a market is less than the quantity supplied; occurs at prices above the qualilbrium

Shortage

situation where the quantity demanded in a market is greater than the quantity supplied; occurs at prices below the equilibrium