key term - Supply and Demand Model

Definition

The supply and demand model is a fundamental economic framework that explains how the price and quantity of a good or service is determined by the interaction between the supply and demand for that good or service. It is a widely used tool for understanding and analyzing various economic issues.

5 Must Know Facts For Your Next Test

1. The supply and demand model is used to explain how the price and quantity of a good or service are determined in a market.
2. The demand curve slopes downward, indicating that as the price of a good or service increases, the quantity demanded decreases, and vice versa.
3. The supply curve slopes upward, indicating that as the price of a good or service increases, the quantity supplied increases, and vice versa.
4. The equilibrium price and quantity are determined by the intersection of the supply and demand curves, where the quantity supplied is equal to the quantity demanded.
5. Changes in factors such as consumer preferences, input prices, or government policies can shift the supply or demand curve, leading to a new equilibrium price and quantity.

Review Questions

• Explain how the supply and demand model is used by economists to understand economic issues.
  • Economists use the supply and demand model as a fundamental tool to analyze and understand various economic issues. By examining the factors that influence the supply and demand for a good or service, economists can predict how changes in those factors will affect the equilibrium price and quantity. This allows them to understand the impact of economic policies, market conditions, and other factors on the overall functioning of the market.
• Describe how the equilibrium price and quantity are determined in the supply and demand model.
  • In the supply and demand model, the equilibrium price and quantity are determined by the intersection of the supply and demand curves. The equilibrium price is the price at which the quantity supplied is equal to the quantity demanded, representing a stable market condition. Any imbalance between supply and demand will lead to a change in price until the market reaches the equilibrium point, where the quantity supplied and the quantity demanded are in balance.
• Analyze how changes in factors such as consumer preferences or input prices can affect the supply and demand curves, and the resulting equilibrium price and quantity.
  • Changes in factors that influence supply or demand can shift the supply or demand curves, leading to a new equilibrium price and quantity. For example, an increase in consumer preferences for a good will shift the demand curve to the right, causing the equilibrium price to rise and the equilibrium quantity to increase. Conversely, an increase in input prices for producers will shift the supply curve to the left, leading to a higher equilibrium price and a lower equilibrium quantity. Economists use the supply and demand model to predict and analyze the impact of these changes on the market.

Related terms

Equilibrium Price:

The price at which the quantity supplied is equal to the quantity demanded, representing a stable market condition.

Demand Curve:

A graphical representation of the relationship between the price of a good or service and the quantity demanded, showing that as price increases, quantity demanded decreases.

Supply Curve:

A graphical representation of the relationship between the price of a good or service and the quantity supplied, showing that as price increases, quantity supplied increases.