Introduction

Module 2 – Demand, Supply, and Market Equilibrium

Module Introduction

This module introduces the cornerstone model in economic theory: the demand and supply model, which is applied at the macro economy level in module 6 and module 7.

We create a tool (the supply-demand graph) to use in examining how a market operates. The model is laid out in blocks, and an approach to understanding the ability of the model to predict the equilibrium outcome variables of price and quantity is explained in detail. We also explain how market situations of price ceilings and price floors may create surpluses and shortages that cannot be eliminated. (1)

Learning Objectives

  • Explain the demand relationship and factors that affect demand.
  • Explain the supply relationship and factors that affect supply.
  • Explain market equilibrium and changes to market equilibrium using the Three-Step Process
  • Explain how price controls cause surpluses and shortages in the market. (1) 

Reading

  • Learning Unit