Demand, supply and price

elasticity of demand

is a measure used in economics to show the responsiveness, or elasticity, of the quantity demanded of a good or service to a change in its price

Market clearing price

is the price of a good or service at which quantity supplied is equal to quantity demanded, also called the equilibrium price.

quantity demanded

the amount of a product people are willing or able to buy at a certain price; the relationship between price and quantity demanded is known as the demand

The law of supply

the higher a price customers are willing to pay for an item, the more the quantity supplied for it

price floor

a situation when the price charged is more than or less than the equilibrium price determined by market forces of demand and supply.

elasticity of supply

(% change in price) As demand for a good or product increases, the price will rise and the quantity supplied will increase in response.

impact of elasticity of demand

...Price elasticity of demand affects a business's ability to increase the price of a product. Elastic goods are more sensitive to increases in price, while inelastic goods are less sensitive. Assuming that there are no costs in producing the product, businesses would simply increase the price of a product until demand falls. Things become more complicated, however, after introducing costs. Let's say that the cost of vanilla flavoring increases as a result of short market supply. As profits equal revenue minus costs, this would lower the ice cream shop's profits. If costs were close to the price of vanilla ice cream, profits would be almost zero. As vanilla ice cream is elastic, the shop manager would be unable to increase the price without damaging demand. Some businesses, therefore, sell some goods that have little to no profit margin. Their main profits come from products in higher demand. In this case, the ice cream shop would increase the price of the more inelastic good, chocolate ice cream, in order to compensate for the loss in profits.

what does a price ceiling cause?

1. A price ceiling has an economic impact only if it is less than the free-market equilibrium price. 2. An effective price ceiling will lower the price of a good, which decreases the producer surplus. The effective price ceiling will also decrease the price for consumers, but any benefit gained from that will be minimized by the decreased sales due to the drop in supply caused by the lower price. 3. If a ceiling is to be imposed for a long period of time, a government may need to ration the good to ensure availability for the greatest number of consumers. 4. Prolonged shortages caused by price ceilings can create black markets for that good.

price ceiling impact

A price ceiling will only impact the market if the ceiling is set below the free-market equilibrium price. This is because a price ceiling above the equilibrium price will lead to the product being sold at the equilibrium price.If the ceiling is less than the economic price, the immediate result will be a supply shortage. As you can see from the chart below, a lower base price means less of a good will be produced. The quantity demanded will increase because more people will be willing to pay the lower price to get the good while producers will be willing to supply less, leading to a shortage. When a price ceiling is set, a shortage occurs. For the price that the ceiling is set at, there is more demand than there is at the equilibrium price. There is also less supply than there is at the equilibrium price, thus there is more quantity demanded than quantity supplied.

complimentary goods

a good whose use is related to the use of an associated or paired good. Two goods (A and B) are complementary if using more of good A requires the use of more of good B.

Market demand

Market demand provides the total quantity demanded by all consumers. In other words, it represents the aggregate of all individual demands. There are two basic types of market demand: primary and selective. Primary demand is the total demand for all of the brands that represent a given product or service, such as all phones or all high-end watches. Selective demand is the demand for one particular brand of product or service, such as the iPhone or a Michele watch. Market demand is an important economic marker because it reflects the competitiveness of a marketplace, a consumer's willingness to buy certain products and the ability of a company to leverage itself in a competitive landscape. If market demand is low, it signals to a company that they should terminate a product or service, or restructure it so that it is more appealing to consumers.

what does a price floor cause?

Setting a binding price floor creates a disequilibrium, because it excludes those who are only interested in purchasing the item at a lower price that the market would otherwise allow. This creates a surplus.

Price effect

The impact that a change in value has on the consumer demand for a product or service in the market. The price effect can also refer to the impact that an event has on something's price. The price effect consists of the substitution effect and the income effect.

individual demands

The individual demand is the demand of one individual or firm. It represents the quantity of a good that a single consumer would buy at a specific price point at a specific point in time. While the term is somewhat vague, individual demand can be represented by the point of view of one person, a single family, or a single household.

price ceiling

a situation when the price charged is more than or less than the equilibrium price determined by market forces of demand and supply. It has been found that higher price ceilings are ineffective.

supply

all of the quantities suppliers are willing to offer at different prices at one time.

Demand

all the quantities consumers are willing to buy at all the possible prices at one time.

surplus

an amount of something left over when requirements have been met; an excess of production or supply over demand.

Price effect for demand

as price goes up the quantity demand goes down. as price goes down the quantity demand goes up.

factors that cause a change in demand

income, prices, preferences and expectations, population shifts

The law of demand

the lower the price for an item, the greater the quantity demanded for it.

quantity supplied

the quantity of a commodity that producers are willing to sell at a particular price at a particular point of time.

substitute goods

two goods that could be used for the same purpose. If the price of one good increases, then demand for the substitute is likely to rise.

shortage

when the demand for a product or service exceeds its supply in a market. It is the opposite of an excess supply