1. Overview

• The topic covers market mechanisms: supply, demand, and equilibrium.
• Located in economic theory, focusing on how buyers and sellers interact.
• Explains how prices are determined, how markets clear, and factors influencing shifts.
• Key ideas include the law of demand, law of supply, market equilibrium, and shifts in curves.

2. Core Concepts & Key Elements

• Market: Place for exchange of goods/services; physical (fish, fruits) or virtual (stock exchange).
• Buyers: Demand side; Sellers: supply side.
• Law of Demand: Inverse relationship between price and quantity demanded.
  • Example: 50% price decrease → 50% increase in quantity demanded.
  • PED calculation: % change Q / % change P.
• Price Elasticity of Demand (PED):
  • PED = 1: elastic (e.g., bottled water, food).
  • PED > 1: unit elastic.
  • PED < 1: inelastic (e.g., fuel, cigarettes).
• Characteristics of Efficient Competitive Market:
  • Many buyers and sellers; negligible individual impact.
  • Perfect information for all agents.
  • Free entry and exit.
  • Homogeneous products.
  • Independent decision-making.
• Demand Curve:
  • Shows relationship between price and quantity demanded.
  • Movement along the curve: due to price changes.
  • Shifts caused by income, tastes, demographics, advertising, expectations.
• Income and Substitution Effects:
  • Income effect: Price increase reduces purchasing power.
  • Substitution effect: Higher prices lead to consumption of alternatives.
• Supply Curve:
  • Relationship between price and quantity supplied.
  • Law of supply: Price increase → quantity supplied increase.
  • Market supply: sum of all individual supplies.
• Shifts in Supply:
  • Changes in profitability, technology, input prices, natural factors, expectations.
• Market Equilibrium:
  • Occurs when supply equals demand.
  • Price adjusts to clear the market.
  • Example: At $0.30, demand exceeds supply (shortage); at $0.70, supply exceeds demand (surplus).
  • Equilibrium price and quantity: where supply and demand curves intersect.

3. High-Yield Facts

• PED formulas:
  • PED = % change in Q / % change in P.
• Elasticity thresholds:
  • PED = 1: elastic.
  • PED > 1: unit elastic.
  • PED < 1: inelastic.
• Market equilibrium:
  • Price adjusts to balance supply and demand.
  • Example: 7000 liters at $0.40.
• Demand shifts:
  • Caused by income, tastes, demographics, advertising, expectations.
• Supply shifts:
  • Caused by profitability, technology, natural factors, input prices, expectations.
• Price adjustments:
  • Prices tend to move toward equilibrium to eliminate shortages or surpluses.

4. Summary Table

5. Mini-Schema (ASCII)

Market
 ├─ Demand
 │   ├─ Law of demand
 │   ├─ Demand curve
 │   ├─ Demand shifts
 │   └─ Income/substitution effects
 └─ Supply
     ├─ Law of supply
     ├─ Supply curve
     └─ Supply shifts
 └─ Equilibrium
     ├─ Price and quantity
     ├─ Market clearing
     └─ Price adjustments

6. Rapid-Review Bullets

• Market: place for goods/services exchange.
• Demand: inverse relation with price; shifts due to external factors.
• PED: elasticity measure; PED=1 is unit elastic.
• Supply: direct relation with price; shifts due to profitability, tech.
• Market equilibrium: where supply equals demand.
• Price adjusts to eliminate shortages or surpluses.
• Demand shifts caused by income, tastes, expectations.
• Supply shifts caused by input costs, technology, natural events.
• Inelastic demand: essential goods (fuel, cigarettes).
• Elastic demand: luxury or non-essential goods.
• Price elasticity influences tax and policy decisions.
• Market efficiency requires many buyers/sellers, perfect info.
• Surplus: price above equilibrium; shortage: below equilibrium.
• Market clears at intersection of demand and supply curves.
• Price changes lead to movement along curves; shifts cause curve displacement.
• Natural disasters can reduce supply, shifting supply curve left.
• Advertising can increase demand, shifting demand curve right.
• Future expectations influence current demand and supply decisions.
• Equilibrium price: where quantity demanded equals quantity supplied.
• Market forces drive prices toward equilibrium over time.
• Changes in input prices affect supply and market prices.
• Homogeneous products ensure competitive markets.
• Perfect info prevents market manipulation.
• Entry and exit barriers influence market dynamics.
• Consumer and producer decisions are independent in competitive markets.
• Market efficiency depends on negligible individual impacts.