Understanding Market Demand and Supply Dynamics

Market

A group of buyers and sellers in a particular product.

Competitive Market

A market in which there are many buyers and sellers of the same good in service, none of whom can influence the price at which the good or service is sold.

Demand

Behavior of buyers.

Quantity Demanded

The actual amount of the good or service consumers are willing to buy at a specific price.

Law of Demand

Higher price for a good, ceteris paribus, leads people to demand a smaller quantity of that good or service.

Market Demand

Sum of quantities demanded by all buyers at each price.

Movement Along Demand Curve

Price changes alone.

Shift in Demand Curve

People are buying more or less at every price.

Income (Rightward Demand Curve Shift)

Increase in income causes increase in quantity demanded at each price.

Inferior Good (Leftward Demand Curve Shift)

Negatively correlated to income; increase in income leads to decrease in demand.

# of buyers (Rightward Demand Shift)

Increase in the number of buyers leads to an increase in quantity demanded.

Substitutes (Rightward Demand Shift)

Two goods if an increase in the price of one causes an increase in demand for the other.

Compliments (Leftward Demand Shift)

An increase in the price of one good causes a fall in demand for the other.

Tastes (Rightward Demand Shift)

Shift in tastes for a good leads to an increase in demand.

Expectations (Right and leftward demand shift)

Affect consumer's buying decisions.

Supply

Behavior of sellers.

Quantity Supplied

Amount the sellers are willing to sell at a certain price.

Market Supply

Sum of quantities supplied by all sellers at each price.

Input Price (Leftward Supply Shift)

A fall in input prices makes production more profitable so firms supply a larger quantity.

Equilibrium

Price has reached the level where quantity supplied equals quantity demanded.

Equilibrium Price

Price that equates quantity supplied with quantity demanded.

Surplus

Quantity supplied is greater than quantity demanded.

Shortage

Quantity demanded is greater than quantity supplied.

Technology (Rightward Supply Shift)

Technological improvements enable producers to spend less on inputs and produce the same amount of output.

#of Sellers (Rightward Supply Shift)

Increase in the number of sellers creates an increase in Qs.

Expectations (Leftward Supply Shift)

Firm expects the price of the goods it sells to rise in the future.

Firm may reduce supply now, to save some of its inventory to sell later at the higher price.