THE MODEL OF DEMAND AND SUPPLY Lesson 3 1

LET’S BUILD THE MODEL… 2

3 1)Demand and supply curves 2)Market equilibrium 3)Excess supply and demand 4)Shifts along the demand and supply curves 5)Parallel shifts of the demand and supply curves

DEMAND CURVE 4 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

SUPPLY CURVE 5 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

MARKET EQUILIBRIUM 6 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

EXCESS DEMAND 7 Definition: occurs when the demand for a good or service exceeds its supply in a market

EXCESS SUPPLY 8 Definition: occurs when the supply for a good or service exceeds its demand in a market

SHIFTS ALONG THE DEMAND CURVE 9 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

SHIFTS ALONG THE SUPPLY CURVE 10 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

SHIFTS OF THE DEMAND CURVE 11 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!)

SHIFTS OF THE SUPPLY CURVE 12 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!)

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? 13