Markets in action

How prices are determined

The price of any product is determined by demand and supply

Equilibrium price: the price where demand and supply are equal

Equilibrium quantity: the quantity that is demanded and supplied at equilibrium price.

Disequilibrium: any position in the market where demand and supply are not equal

Surplus: an excess of supply over demand

Shortage: an excess of demand over supply

When demand is greater than supply, price will rise

Elasticity of demand

Elasticity: the extent to which buyers and sellers respond to a cange in market conditions 

Price elasticity of demand = %change in quantity demanded / %change in price

The responsiveness of the quantity demanded to a change in price of a product

Price elastic: where the percentage change in the quantity demanded is sensitive to a change in price

Price inelastic: where the percentage change in quantity demanded is insensitive to a…