demanded o Aka situation of excess supply o Suppliers are unable to sell all they want at the going price Shortage o A situation in which quantity demanded is greater than quantity supplied o Demanders are unable to buy all they want at a going price o Aka situation of excess demand Law of supply and demand o The claim that the price of any good adjusts to bring the quantity supplied and the quantity demanded for that good into balance o How to analyze changes in equilibrium Decide whether the event shifts the supply of demand curve (or both) Decide in which direction the curve shifts Use the supply and demand diagram to see how the shift changes the equilibrium price and quantity
Summary Economists use the model of supply and demand to analyze competitive markets. In a competitive market, there are many buyers and sellers each of whom has little or no influence on the market price The demand curve shows how the quantity of a good demanded depends on the price. According to the law of demand, as the price of a good falls, the quantity demanded rises. Therefore the demand curve slopes downward In addition to price, other determinants of how much consumers want to buy include income, the prices of substitutes and complements, tastes, expectations and the number of buyers. If one of these factors changes, the demand curve shifts The supply curve shows how the quantity of a good supplied depends on the price. According to the law of supply, as the price of a good rises, the quantity supplied rises. Therefore, the supply curve slopes upward In addition to price, other determinants of how much producers want to sell include input prices, technology, expectations and the number of sellers. If one of these factors changes, the supply curve shifts. The intersection of the supply and demand curves determined the market equilibrium. At the equilibrium price, the quantity demanded equals the quantity supplied The behavior of buyers and sellers naturally drives markets toward their equilibrium. When the market price if above the equilibrium price, there is a surplus of the good, which causes the market price to fall. When the market price is below the equilibrium price, there is a shortage, which causes the market price to rise.
To analyze how any event influences a market, we use the supply and demand diagram to examine how the event affects the equilibrium price and quantity. To do this we follow three steps. First we decide whether the event shifts the supply curve or the demand curve (or both). Second, we decide in which direction the curve shifts. Third, we compare the new equilibrium with the initial equilibrium.
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