The market: supply, demand and price

The law of supply and demand, the equilibrium price, shortage and surplus, shifts of a curve, price elasticity and the four market structures.

The outline, topic by topic

Each topic is weighted the way the exam weighs it.

Law of supply and demand: what is it?
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When the price rises, producers offer more and buyers want less; when it falls, the reverse happens.
The two curves slope in opposite directions: the supply curve rises, the demand curve falls. Where they cross is the equilibrium.
A frost destroys half of the apricot harvest. What happens to the market equilibrium?
- Higher price, lower quantity traded
- Higher price, higher quantity traded
- Lower price, higher quantity traded
- Lower price, lower quantity traded
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Higher price, lower quantity traded
The supply curve shifts left while demand stays put: we move up along demand, to a higher price and a smaller quantity.
A change in the good's own price is a movement … the demand curve; a change in income or tastes … the whole curve.
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A change in the good's own price is a movement along the demand curve; a change in income or tastes shifts the whole curve.
Price is already on the vertical axis: it can only slide the point. Anything not on it (income, tastes, other goods' prices) shifts the curve.
Equilibrium price: what is it?
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The price at which the quantity demanded equals the quantity supplied: everything offered finds a buyer, with no shortage or surplus.
Away from equilibrium pressure builds up: a surplus pushes sellers to cut prices, a shortage pushes buyers to bid them up.