Chapter Outline

Supply and demand analysis is the basic tool for studying markets.
1. The law of demand shows that quantities purchased in a market are inversely related to price
2. Supply is positively related to price.
3. The price-quantity pair at the intersection of the supply and demand curve is denoted as the market equilibrium. Supply and demand curves can also illustrate surpluses and shortages that result from prices that differ from the equilibrium price.
At any other price and quantity pair other than the market equilibrium some buyers and sellers can be made better off without making the remaining buyers and sellers worse off. In this sense the market equilibrium results in the best attainable outcome.
A market equilibrium is an efficient rather than a “fair” outcome.
Not using the price mechanism to allocate goods leads to inefficiency.
1. Allocation using a first-come-first-served method reduces consumer welfare.
2. Price fixing results in either a surplus or shortage in a market.
Supply and demand are complex functions influenced by many factors.
1. Demand for a good varies with the size of the population and with consumers' income, tastes, expectations, and response to other goods' price changes.
2. Supply of a good depends upon existing technology, factor prices, the number of suppliers, and their expectations.
Shifts in the market curves are referred to as changes in demand or supply.
Movements along either the supply or demand curve that result from shifts in the other curve are called changes in quantity supplied or demanded, respectively.
Changes in equilibrium outcomes resulting from the imposition of a sales tax are the same regardless of whether the tax is levied directly on the consumer or the producer.

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