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THE MODEL OF DEMAND AND

SUPPLY

Lesson 3

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LET’S BUILD THE MODEL…

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LET’S BUILD THE MODEL…

1)Demand and supply curves2)Market equilibrium3)Excess supply and demand4)Shifts along the demand and supply

curves5)Parallel shifts of the demand and

supply curves

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DEMAND CURVE

Definition:

shows the negative relationship between the price of a certain good or service and the amount of it that consumers are willing and able to purchase at that given price

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SUPPLY CURVE

Definition:

shows the positive relationship between the price of a certain good or service and the amount of it that suppliers are willing and able to sell at that given price

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MARKET EQUILIBRIUM

Definition:

refers to a situation where a market price is established through competition such that the amount of goods or services bought by consumers is equal to the amount of goods or services sold by suppliers

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EXCESS DEMAND

Definition:

occurs when the demand for a good or service exceeds its supply in a market

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EXCESS SUPPLY

Definition:

occurs when the supply for a good or service exceeds its demand in a market

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SHIFTS ALONG THE DEMAND CURVE

Definition:

occurs if there is a change in price. An increase in price, P1 to P2 causes a change in demand from Q1 to Q2

A change in price doesn’t shift the demand curve – we merely move from one point of demand curve to another

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SHIFTS ALONG THE SUPPLY CURVE

Definition:

occurs if there is a change in price. An increase in price, P1 to P2 causes a change in supply from Q1 to Q2

A change in price doesn’t shift the supply curve – we merely move from one point of supply curve to another

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SHIFTS OF THE DEMAND CURVE

Definition:

occurs when the whole demand curve moves to the right or left as a result of different factors

(The price of the good or service does NOT change!)

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SHIFTS OF THE SUPPLY CURVE

Definition:

occurs when the whole supply curve moves to the right or left as a result of different factors

(The price of the good or service does NOT change!)

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WHAT DID YOU LEARN?

1) Can you draw a correct and complete model of demand and supply?

2) Can you define the market equilibrium in your own words?3) Can you explain what happens in situations of excess

supply and excess demand?4) Can you explain the difference between a shift along the

demand or supply curve and a parallel shift of the demand or supply curve?

5) Can you explain the reasons for parallel shifts of the demand or supply curve?