Supply and demand is the model the rest of the course is built on. This unit covers what moves each curve, how strongly buyers and sellers respond to price (elasticity), how equilibrium splits the gains between consumers and producers, and what happens when governments step in with price controls, taxes, subsidies and trade policy.
The law of demand: a higher price lowers quantity demanded, a movement along the curve. Anything else that changes what buyers want (income, tastes, related prices, expectations, number of buyers) shifts the whole curve.
The law of supply: a higher price raises quantity supplied, a movement along an upward-sloping curve. Input prices, technology, the number of sellers, expectations, taxes and subsidies shift the whole curve.
Price elasticity of demand measures how strongly quantity demanded responds to price. Above 1 is elastic, below 1 inelastic. It decides whether a price rise raises or lowers total revenue, and it changes along a straight-line demand curve.
Price elasticity of supply measures how strongly quantity supplied responds to price, with the same benchmark of 1. Supply is more elastic when producers have time, spare capacity and inputs they can easily get or switch.
Income elasticity tells you whether a good is normal (positive) or inferior (negative). Cross-price elasticity tells you whether two goods are substitutes (positive), complements (negative) or unrelated (zero).
Equilibrium is where quantity demanded equals quantity supplied. Consumer surplus is the area under demand and above the price; producer surplus is the area above supply and below the price. With no market failure, equilibrium maximizes their sum.
A price below equilibrium creates a shortage and a price above it creates a surplus; market forces push price back. Shifts in demand or supply move the equilibrium, and when both shift, either price or quantity is indeterminate.
Binding price ceilings cause shortages and binding price floors cause surpluses. Taxes and subsidies shift supply or demand. Every one of these, applied to an efficient market, creates deadweight loss. Tax incidence falls more on the less elastic side.
Opening to trade moves the domestic price to the world price. Importers gain consumer surplus and lose producer surplus, with a net gain. Tariffs and quotas raise the domestic price, shrink imports and cut total surplus.