Demand, supply and market equilibrium

Demand

a) Definition of demand.

Definition: Demand is the willingness and ability to purchase a good or service at a given price over a period of time.

b) The use of a demand curve diagram to show:

• Changes in price causing movements along a demand curve

• Shifts indicating increased and decreased demand.

c) Factors that may cause a shift in the demand curve:

• Advertising

• Income

• Fashion and tastes

• Price of substitute goods

• Price of complementary goods

• Demographic changes.

Supply

d) Definition of supply.

Definition: Supply is the willingness and ability to sell a good or service at a given price over a period of time.

e) The use of supply curve diagram to show:

• Changes in price causing movements along a supply curve

• Shifts indicating increased and decreased supply.

Market Equilibrium

g) Equilibrium price and quantity and how they are determined.

Definition: Equilibrium price is the price at which quantity supply and quantity demanded are equal.

Definition: Equilibrium quantity is the amount bought and sold in the market at the equilibrium price.

• Equilibrium is determined at the point where the demand and supply curves intersect in a market.

h) 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

i) Define, calculate and draw excess demand and excess supply.

Excess Demand (Shortage)

Definition: Excess demand is when quantity demanded exceeds quantity supplied at a given price.

Formula: Excess Demand = Quantity Demanded - Quantity Supplied

Excess Supply (Surplus)

Definition: Excess supply is when quantity supplied exceeds quantity demanded at a given price.

Formula: Excess Supply = Quantity Supplied - Quantity Demanded

j) The use of market forces to remove excess supply or excess demand.

Excess Demand: Sellers raise prices, decreasing demand and increasing supply to re-establish equilibrium.

Excess Supply: Producers reduce prices, increasing demand and decreasing supply until equilibrium is restored.

Movement:

Movement:

Shift:

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