Demand, Supply And Market Equilibrium
Overview
Nobody sets the price of a banana at a market stall by committee. Buyers and sellers, each acting purely in their own interest, push the price up and down until it lands at the one figure where every buyer willing to pay finds a seller willing to sell, and every seller willing to sell finds a buyer. That self-correcting process is the heart of market economics.
In this lesson you will build the demand curve and the supply curve from first principles, learn the crucial difference between a movement along a curve and a shift of the whole curve, and put both curves together to find equilibrium price and quantity. You will also learn to identify and remove excess demand and excess supply, the two states a market falls into whenever price sits away from equilibrium.
Objectives
- Definition of demand
- The use of demand curve diagram to show changes in price causing movements along a demand curve, and shifts indicating increased and decreased demand
- Factors that may cause a shift in the demand curve, including advertising, income, fashion and tastes, price of substitute goods, price of complementary goods, demographic changes
- Definition of supply
- The use of supply curve diagram to show changes in price causing movements along a supply curve, and shifts indicating increased and decreased supply
- Factors that may cause a shift in the supply curve, including costs of production, changes in technology, indirect taxes, subsidies, natural factors (natural disasters and weather)
- Equilibrium price and quantity and how they are determined
- The use of diagrams to show how shifts in supply and demand affect equilibrium price and quantity in real-world situations, excess demand, excess supply
- Define, calculate and draw excess demand and excess supply
- The use of market forces to remove excess supply or excess demand
Lesson Note
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Lesson Evaluation
Congratulations on completing the lesson on Demand, Supply And Market Equilibrium. Now that youve explored the key concepts and ideas, its time to put your knowledge to the test. This section offers a variety of practice questions designed to reinforce your understanding and help you gauge your grasp of the material.
You will encounter a mix of question types, including multiple-choice questions, short answer questions, and essay questions. Each question is thoughtfully crafted to assess different aspects of your knowledge and critical thinking skills.
Use this evaluation section as an opportunity to reinforce your understanding of the topic and to identify any areas where you may need additional study. Don't be discouraged by any challenges you encounter; instead, view them as opportunities for growth and improvement.
- The demand curve for a good slopes downward because: A) As price rises, quantity demanded rises B) As price falls, quantity demanded rises C) Price and quantity demanded are unrelated D) Supply always exceeds demand Answer: B
- A fall in the price of a good itself causes: A) A shift of the demand curve to the right B) A shift of the demand curve to the left C) A movement along the existing demand curve D) No change in quantity demanded Answer: C
- An increase in the price of a complementary good will cause the demand curve for this good to: A) Shift to the right B) Shift to the left C) Stay the same, with a movement along the curve D) Become vertical Answer: B
- At a given price, quantity supplied is 400 units and quantity demanded is 550 units. This situation is best described as: A) Equilibrium B) Excess supply of 150 units C) Excess demand of 150 units D) Excess demand of 400 units Answer: C
- Which of the following would shift the supply curve for a good to the left? A) A government subsidy to producers B) A fall in the cost of raw materials C) The introduction of a new indirect tax on the good D) An improvement in production technology Answer: C
Available on the Green Bridge App
Download the Green Bridge CBT app on your phone or computer to access full lesson notes, practice questions, and more.
Available on the Green Bridge App
Download the Green Bridge CBT app on your phone or computer to access full lesson notes, practice questions, and more.
Recommended Books
Practice Mock Questions
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