 |  Macroeconomics, 9/e Campbell R. McConnell,
University of Nebraska, Lincoln
Stanley L. Brue,
Pacific Lutheran University
Thomas P. Barbiero,
Ryerson University
Demand and Supply
Chapter HighlightsCHAPTER 3- A market is an institution or arrangement that brings together buyers and sellers of a product, service, or
resource for the purpose of exchange.
- Demand is a schedule or curve representing the willingness of buyers in a specific period to purchase a particular
product at each of various prices. The law of demand implies that consumers will buy more of a product
at a low price than at a high price. Therefore, other things equal, the relationship between price and
quantity demanded is negative or inverse and is graphed as a downsloping curve. Market demand curves are
found by adding horizontally the demand curves of the many individual consumers in the market.
- Changes in one or more of the determinants of demand (consumer tastes, the number of buyers in the market,
the money incomes of consumers, the prices of related goods, and price expectations) shift the market
demand curve. A shift to the right is an increase in demand; a shift to the left is a decrease in demand. A
change in demand is different from a change in the quantity demanded, the latter being a movement from
one point to another point on a fixed demand curve because of a change in the product's price.
- Supply is a schedule or curve showing the amounts of a product that producers are willing to offer in the market
at each possible price during a specific period. The law of supply states that, other things equal, producers
will offer more of a product at a high price than at a low price. Thus, the relationship between price and
quantity supplied is positive or direct, and supply is graphed as an upsloping curve. The market supply curve
is the horizontal summation of the supply curves of the individual producers of the product.
- Changes in one or more of the determinants of supply (resource prices, production techniques, taxes or subsidies,
the prices of other goods, price expectations, or the number of sellers in the market) shift the supply
curve of a product. A shift to the right is an increase in supply; a shift to the left is a decrease in supply. In contrast,
a change in the price of the product being considered causes a change in the quantity supplied, which
is shown as a movement from one point to another point on a fixed supply curve.
- The equilibrium price and quantity are established at the intersection of the supply and demand curves. The
interaction of market demand and market supply adjusts the price to the point at which the quantity
demanded and supplied are equal. This is the equilibrium price. The corresponding quantity is the equilibrium
quantity.
- The ability of market forces to synchronize selling and buying decisions to eliminate potential surpluses and
shortages is known as the rationing function of prices.
- A change in either demand or supply changes the equilibrium price and quantity. Increases in demand raise
both equilibrium price and equilibrium quantity; decreases in demand lower both equilibrium price and equilibrium
quantity. Increases in supply lower equilibrium price and raise equilibrium quantity; decreases in supply
raise equilibrium price and lower equilibrium quantity.
- Simultaneous changes in demand and supply affect equilibrium price and quantity in various ways, depending
on their direction and relative magnitudes.
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2002 McGraw-Hill Higher Education