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Economic Theory

5. DEMAND AND SUPPLY

Content

1. Markets. Competitive markets.
2. Meaning of demand. Demand schedule and demand curve. Law of
demand. Determinants of demand.

3. Meaning of supply. Supply schedule and supply curve. Law of
supply. Determinants of supply.
4. Market equilibrium.

5. Elasticity of demand and supply.

Key words: market, demand, supply, price, quantity demanded,

quantity supplied, law of demand, law of supply, equilibrium, excess
supply, excess demand, elasticity.

1. Markets. Competitive Markets
A market is a group of economic agents who are trading a good or
service, and the rules and arrangements for trading. Agricultural and

industrial goods like wheat, soybeans, iron, and coal are all traded on
markets. A market may have a specific physical location – like Holland’s
Aalsmeer Flower Auction – or not. For example, the market for gasoline is

dispersed – located on every corner you find a gas station. Likewise,
Monster.com (a Web-based job market) operates wherever there’s a
computer and an Internet connection.
The discussion focuses on markets in which all exchanges occur

voluntarily at flexible prices. It explains how markets use prices to allocate
goods and services. Prices act as a selection device that encourages trade
between the sellers who can produce goods at low cost and the buyers who

place a high value on the goods.
If all sellers and all buyers face the same price, that price is referred to
as the market price. In a perfectly competitive market, sellers all sell an

identical good or service, and any individual buyer or any individual seller
isn’t powerful enough on his or her own to affect the market price. This
implies that buyers and sellers are all price-takers. In other words, they

accept the market price and can’t bargain for a better price.
Very few, if any, markets are perfectly competitive. But economists
try to understand such markets anyway. At first this sounds kind of nutty.

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