Summary: to fall.

When the market price is below the equilibrium price, there

• Economists use the model of supply and demand to analyze is a shortage, which causes the market price to rise.
competitive markets. *To analyze how any event influences a market, we use the supply-
– Many buyers and sellers, all are price takers and-demand diagram to examine how the event affects the
• The demand curve shows how the quantity of a good demanded equilibrium price and quantity. To do this, we follow three steps.
depends on the price.
First, we decide whether the event shifts the supply curve or the
– Law of demand: as the price of a good falls, the quantity
demand curve (or both). Second, we decide in which direction the
demanded rises; the D curve slopes downward
– Other determinants of demand: income, prices of substitutes and curve shifts. Third, we compare the new equilibrium with the initial
complements, tastes, expectations, and number of buyers. equilibrium.
– If one of these factors changes, the D curve shifts *In market economies, prices are the signals that guide economic
• The supply curve shows how the quantity of a good supplied decisions and thereby allocate scarce resources. For every good in
depends on the price. the economy, the price ensures that supply and demand are in
– Law of supply: as the price of a good rises, the quantity supplied balance. The equilibrium price then determines how much of the
rises; the S curve slopes upward. good buyers choose to consume and how much sellers choose to
• Other determinants of supply: input prices, technology, produce
expectations, and number of sellers.
– If one of these factors changes, supply curve shifts. Market: a group of buyers and sellers of a particular good or service
• The intersection of the supply and demand curves determines the competitive market: a market in which there are many buyers and
market equilibrium.
many sellers so that each has a negligible impact on the market price
– At the equilibrium price, quantity demanded = quantity supplied
quantity demanded the amount of a good that buyers are willing
• The behavior of buyers and sellers naturally drives markets toward
their equilibrium. and able to purchase
– When the market price is above the equilibrium price, there is a law of demand the claim that, other things being equal, the quantity
surplus of the good, which causes the market price to fall. demanded of a good falls when the price of the good rises
– When the market price is below the equilibrium price, there is a demand schedule a table that shows the relationship between the
shortage, which causes the market price to rise price of a good and the quantity demanded
• To analyze how any event influences a market, we use the supply- demand curve a graph of the relationship between the price of a
and-demand diagram to examine how the event affects the good and the quantity demanded
equilibrium price and quantity. Demand curve shift if something happens to alter the quantity
1. Decide whether the event shifts the supply curve or the demand demanded at any given price
curve (or both). Increase in demand: increase quantity of demand at every price,
2. Decide in which direction the curve shifts.
shift demand curve to right.
3. Compare the new equilibrium with the initial one.
Decrease in demand: reduces quantity of demand at every price,
• In market economies, prices are the signals that guide economic
decisions and thereby allocate scarce resources. shift demand curve to left.
normal good: a good for which, other things being equal, an increase
*Economists use the model of supply and demand to analyze in income leads to an increase in demand
competitive markets. In a competitive market, there are many inferior good: a good for which, other things being equal, an
buyers and sellers, each of whom has little or no influence on the increase in income leads to a decrease in demand
market price. substitutes: two goods for which an increase in the price of one
*The demand curve shows how the quantity of a good demanded leads to an increase in the demand for the other
depends on the price. According to the law of demand, as the price complements: two goods for which an increase in the price of one
of a good falls, the quantity demanded rises. Therefore, the demand leads to a decrease in the demand for the other
curve slopes downward. quantity supplied: the amount of a good that sellers are willing and
*In addition to price, other determinants of how much consumers able to sell
want to buy include income, the prices of substitutes and law of supply: the claim that, other things being equal, the quantity
complements, tastes, expectations, and the number of buyers. If one supplied of a good rises when the price of the good rises
of these factors changes, the demand curve shifts. supply schedule: a table that shows the relationship between the
*The supply curve shows how the quantity of a good supplied price of a good and the quantity supplied
depends on the price. According to the law of supply, as the price of supply curve: a graph of the relationship between the price of a
a good rises, the quantity sup plied rises. Therefore, the supply good and the quantity supplied
curve slopes upward. Supply curve shift: drawn holding things constant when one factor
*In addition to price, other determinants of how much producers changes.
want to sell include input prices, technology, expectations, and the Increase in supply: raises quantity supply at every price, shift supply
number of sellers. If one of these factors changes, the supply curve curve to the right.
shifts. Decrease in supply: reduces quantity supply at every price, shift
*The intersection of the supply and demand curves determines the supply curve to the left.
market equilibrium. At the equilibrium price, the quantity demanded Equilibrium: a situation in which the market price has reached the
equals the quantity supplied. level at which quantity supplied equals quantity demanded
*The behavior of buyers and sellers naturally drives markets toward equilibrium price: the price that balances quantity supplied and
their equilibrium. When the market price is above the equilibrium quantity demanded
price, there is a surplus of the good, which causes the market price
equilibrium quantity: the quantity supplied and the quantity
demanded at the equilibrium price
surplus: a situation in which quantity supplied is greater than
quantity demanded
shortage: a situation in which quantity demanded is greater than
quantity supplied
law of supply and demand: the claim that the price of any good
adjusts to bring the quantity supplied and the quantity demanded
for that good into balance

1. A change in which of the following will NOT shift the demand

curve for hamburgers?
b. the price of hamburgers
2. An increase in ________ will cause a movement along a given
demand curve, which is called a change in ________.
b. supply, quantity demanded
3. Movie tickets and film streaming services are substitutes. If the
price of film streaming increases, what happens in the market for
movie tickets?
d. The demand curve shifts to the right.
4. The discovery of a large new reserve of crude oil will shift the
________ curve for gasoline, leading to a ________ equilibrium
price.
b. supply, lower
5. If the economy goes into a recession and incomes fall, what
happens in the markets for inferior goods?
a. Prices and quantities both rise.
6. Which of the following might lead to an increase in the
equilibrium price o
f jelly and a decrease in the equilibrium quantity of jelly sold?
c. an increase in the price of grapes, an input into jelly