Chapter 3
Demand, supply, and the market
You can also download a word document of these chapter's revison notes from the following link:
Chapter_3.doc

Some key terms
  • Market
    • a set of arrangements by which buyers and sellers are in contact to exchange goods or services
  • Demand
    • the quantity of a good buyers wish to purchase at each conceivable price
  • Supply
    • the quantity of a good sellers wish to sell at each conceivable price
  • Equilibrium price
    • price at which quantity supplied = quantity demanded
    •

The Demand curve shows the relation between price and quantity demanded holding other things constant
  • "Other things" include:
    • the price of related goods
    • consumer incomes
    • consumer preferences
  • Changes in these other things affect the position of the demand curve
    •

The Supply curve shows the relation between price and quantity supplied holding other things constant
  • "Other things" include:
    • technology
    • input costs
    • government regulations
  • Changes in these other things affect the position of the demand curve
    •

Market equilibrium
  • Market equilibrium is where quantity demanded equals quantity supplied
    •

What, How and For Whom
  • The market:
    • decides how much of a good should be produced
      • by finding the price at which the quantity demanded equals the quantity supplied
    • tells us for whom the goods are produced
      • those consumers willing to pay the equilibrium price
    • determines what goods are being produced
      • there may be goods for which no consumer is prepared to pay a price at which firms would be willing to supply
    •


Copyright Peter Smith 2000 - all rights reserved