The market: set of arrangements whereby buyers and sellers exchange goods and services.
Demand: Quantity of a good or service that buyers wish to purchase at each conceivable price,
with all other influences remaining unchanged.
Supply: is the quantity of a good or service that sellers are willing to sell at each possible price,
with all other influences on supply remaining unchanged.
Quantity demanded: refers to the amount purchased at a particular price. (Behavior at a
Quantity supplied: refers to the amount supplied at a particular price. (Behavior at a particular
Note: The demand and supply schedules are constructed on the assumption that,
when the prices change other influences remain constant. (Constancy of other variables is
described as other things being equal or ceteris paribus)
Equilibrium price: intermediate price where the quantity demanded equals the quantity
supplied. Demand curve meets the supply curve at point E.
Excess supply: When the quantity supplied exceeds the quantity demanded at the going price.
At any price above the equilibrium, the horizontal distance between the supply and demand
curves represents the surplus.
Excess demand: When the quantity demanded exceeds the quantity supplied. At any price
below the equilibrium, the horizontal distance between the supply and demand curves
represents the shortage.
1. Note: When there is excess demand at prices below the equilibrium Suppliers could
force the price upward knowing that buyers will continue to buy at the price sellers are willing
to sell. Such upward pressure would continue until the excess demand is eliminated.
2. If sales do take place above or below the equilibrium price, the quantity traded will
always correspond to the short side of the market. Where if trading takes place at prices other
than the equilibrium price it will always be the lesser of the quantity demanded or supplied
that is traded. Short side dominates.
Demand and supply curves
Demand curve: shows the relation between price and quantity demanded, holding other things
constant. The curve is linear and has a negative slope, reflecting the fact that buyers wish to
purchase more at lower prices.
Demand curve influences: shifts in any of these elements will result in a new
equilibrium point (E 1 either above or below the original equilibrium point (E 0
Comparative static analysis: examining the impact of changing one of the other variables that
are assumed constant in the supply and demand diagrams.
1. Price of related goods
1. Complementary good: if the demand for a good is increased as a result of a
price reduction of another.
1. i. If a Complementary
good’s price increases, we would expect that the demand for all other complementary goods
to increase at each price. Therefore, the demand curve would shift in response to the price of
the other good.
2. Substitute: if a price reduction for one good reduces the demand. 1. i. If a substitute’s price
increases, we would expect that the demand for