Chapter 2 Demand, Supply, and Equilibrium Analysis

Market Market is an institutional arrangement under which buyers and sellers can exchange goods and services at a mutually agreeable price. Assuming perfect competition

Market Demand The amount of a commodity which the consumers are willing and able to purchase at each price. Inverse price-quantity relationship

Change in Quantity and Change in Demand When the good’s/service’s own price change then change in quantity demanded. If the factors effecting demand (except own price) change then change in demand. For example, change in income, change in taste, change in price of substitute, change in advertisement expenditures, etc.

Market Supply The amount of a commodity which the producers are willing to offer at each price. Positive relationship between price and quantity supplied.

Change in Quantity Supplied and Change in Supply When the good’s/service’s own price change then change in quantity supplied. If the factors effecting supply (except own price) change then change in supply. For example, change in the price of resources, change in technology, change in climate etc.

Market Equilibrium The interaction of demand and supply determine the price. Euilibrium is achieved when quantity demanded is equal to quantity supplied. Surplus When quantity supplied exceeds quantity demanded. Shortage When quantity demanded exceeds quantity supplied.