Supply and Demand

Large number of buyers and sellers, homogeneous good/service, nothing a firm or buyer does has an effect on price, buyers and sellers are price takers

Illustrates the quantity of a good/service consumers want to purchase at different prices, ceteris paribus i.e. holding constant all other things that may influence demand

Other things being equal, the higher the price of a good, the lower the demand wil be for it

Changes in the quantity demanded of a good vaused by changes in that good's price, ceteris paribus, result in movemnts along the demand curve

Take place when there is a change in the quantity demanded of a good at any given price

Changes in income, changes in preferences, chnages in expectations, changes in the prices of related goods, changes in size/structure of the population

Demand rises when income increases

Demand decreases when income increases

Illustrates the quantity of a good/service producers want to provide at different prices, holding constant all other things that may influence supply

The higher the price of a good, the larger the quantity producers will be interested in supplying

Changes in input prices, changes in technology, changes in expectations, changes in the number of sellers

The methods people can use to transform inputs into useful goods. Improvenments in technology reduce the quantity of inputs necessary to obtain a given amount of a good, resulting in a reduction in the cost of production

A situation where nobody has an incentive to chnage their behaviour

If market price does not equate supply and demand (There is excess demand or supply)

Frustrated sellers have an incentive to lower prices leading to competition which drives down market price. Price-cutting behaviour will push the prevailing price down resulting in a fall in quantity supplied and a rise in quantity demanded until equilibrium is achieved

Frustrated buyers have an incentive to offer higher prices therfore the competition between buyers drives market prices up. Sellers have an incentive to take advantage of the shortage by asking higher prices. Bidding up will push prevailing price up resulting in a rise in quantity supplied and a fall in the quantity demanded until equilibrium is reached

Sets in motion a process whereby supply and demand adjust until the equilibrium price is achieved

When demand increases and supply decreases, the equilibrium price rises but the effect on quantity is ambiguous. When demand decreases and supply increases, the equilbrium price falls but the effect on quantity is ambiguous

If supply and demand both shift out, the effect on price is ambiguous and quantity rises. If supply and demand both shift in, the effect of price is ambiguous and quantity falls.