Unit 2: Supply and Demand

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Demand is defined as the different quantities of goods and services that consumers are willing and able to purchase at various price levels.

Supply is the different quantities of goods and services that firms are willing and able to produce at various price levels.

The price elasticity of demand refers to how responsive consumers are to a change in price in the market. It shows us just how much consumers will alter their consumption when the price of a product changes.

The price elasticity of supply is the measurement of how responsive firms (businesses) are to a change in the price of a good or service in the market. It shows us just how much they will alter their production when the price of a product changes.

The price elasticity of supply is the measurement of how responsive firms (businesses) are to a change in the price of a good or service in the market. It shows us just how much they will alter their production when the price of a product changes.

Cross-Price Elasticity of Demand is the measurement of how responsive the market is when a change in the price of one good affects the demand for either a substitute or complementary good.

Market equilibrium is a condition in a market where the quantity supplied equals the quantity demanded at an optimal price level.

Markets naturally fluctuate away from equilibrium, which causes market disequilibrium.

A price ceiling is a type of government intervention that is used when the government determines that the price of a good or service is too expensive for buyers/consumers. For a price ceiling to be effective, or binding, it must be located BELOW the equilibrium price. At the lower price, the quantity demanded will increase and the quantity supplied will decrease, resulting in a market shortage. A very common example of a price ceiling is rent controls. These are price limits placed on a particular type of housing (i.e. apartments, condos, etc.) in particular areas to prevent landlords from drastically increasing rent. Another example is taxi fares. In some major cities like Washington D.C. and New York City, there are maximum fare limits placed.

International trade allows all countries around the world to expand their markets and makes goods and services available to their population that might not be available domestically. International trade increases the variety of goods and services available to the population while creating a sense of competition, which in turn lowers prices for consumers. Public policy is just simply the laws and regulations that govern economic activity. There are many trade agreements in place to govern international trade, such as NAFTA (North American Free Trade Agreement) and ASEAN (Association of Southeast Asian Nations). For example, in the United States, our largest trading partners are China, Canada, and Mexico. We participate in international trade because it is cheaper for us to trade for the goods than to produce them domestically (i.e. shoes, clothing, electronics).