Key Points (C. 3-5)
Demand is the quantities of a good or service consumers are willing and able to buy at different possible prices at a particular time.
Supply is the various amounts of a good or service producers are willing and able to sell at different possible prices at a particular time.
The Law of Demand says that consumers will buy more of something at lower prices than at higher prices. This is also known as the Price Effect on Demand.
The Law of Supply says that producers are willing and able to sell more at higher prices than at lower prices. This is also known as the Price Effect on Supply.
Price Elasticity of Demand is a measurement of the impact of the Price Effect. If the price effect is large, demand for the product is elastic; if the price effect is small, demand for the product is inelastic. A formula to assist in determining the elasticity of demand is TR=PxQ. If TR goes up when P goes up, demand is inelastic. If TR goes down when P goes up, demand is elastic.
Price Elasticity of Supply is a measurement of the impact of the Price Effect. If the price effect is large, supply of the product is elastic; if the price effect is small, supply of the product is inelastic. Economists compare the percentage change in price with the percentage change in the amount supplied. If a 5% increase in price causes the amount supplied to rise by more than 5%, then supply is elastic. If the amount supplied rises by less than 5%, supply is inelastic.
Price Effect is always reflected on the curve (demand or supply).
A Change in Demand means that the entire demand curve must shift to the left (decrease) or to the right (increase).
A Change in Supply means that the entire supply curve must shift to the left (decrease) or to the right (increase).
The Market Clearing Price or Market Equilibrium is the price that balances the amount buyers want to buy with the amount sellers want to sell. In other words, D=S.
A Shortage occurs when buyers want to buy more of a product than sellers want to sell at a given price. In other words, D>S. A shortage is reflected on the graph below the equilibrium price.
A Surplus occurs when sellers want to sell more of a product than buyers want to buy at a given price. In other words, S>D. A surplus is reflected on the graph above the equilibrium price.