Macro 02/20

Market Dynamics

• Price Changes

  • When the price of a good or service increases, two primary effects occur:

    • Decrease in Quantity Demanded

      • Higher prices typically lead to a lower quantity demanded by consumers due to diminished purchasing power or perceived value.

    • Increase in Quantity Supplied

      • On the supply side, higher prices incentivize producers to increase the quantity they offer for sale, as the potential for greater revenue becomes appealing.

Law of Supply and Demand

• Law of Demand: As prices rise, demand tends to fall, resulting in a downward-sloping demand curve.

• Law of Supply: As prices rise, supply tends to increase, resulting in an upward-sloping supply curve.

Equilibrium Price

• Equilibrium occurs when the quantity demanded equals the quantity supplied at a specific price point.

  • Any shift in demand or supply can affect this equilibrium, leading to either a surplus or a shortage in the market.

Conclusion

• Understanding the interplay of price fluctuations is fundamental to grasping market behavior, which hinges on changes in both demand and supply.