Demand, Supply, and Price Determination


To explain demand and supply, and show how they work using schedules and graphs.

To show how demand and supply are affected by changes in price and nonprice factors.

To demonstrate how demand and supply interact in markets to determine prices, and to show equilibrium price and quantity, shortages, and surpluses in a market.

To explain how changes in demand and changes in supply affect equilibrium prices and quantities in markets.

To illustrate how government-imposed price ceilings and price floors influence market conditions.

To introduce the concept and calculation of price elasticity, which measures buyers' and sellers' sensitivities to price changes.


As we noted in Chapter 2, one way societies can make the basic economic decisions is through individual buyers' and sellers' actions in markets. Many societies, such as the United States, and some countries in Western Europe and Asia, base their economic systems on such market decision making. There are two basic economic tools to study buyers and sellers and their behaviors in the marketplace: demand and supply. Together, these tools help us understand the forces at work in a market economy. In this chapter, we explore demand and supply in detail, and then put the two together to see how they interact to determine the prices of goods and services.


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