Demand and Supply

Introduction to Demand and Supply

The concepts of demand and supply form the foundation of microeconomic analysis. They explain how prices are determined in markets and how resources are allocated efficiently.

• Demand refers to the quantity of a good or service that consumers are willing and able to purchase at various prices during a given period.

• Supply refers to the quantity of a good or service that producers are willing and able to offer for sale at various prices during a given period.

• Market equilibrium occurs where the quantity demanded equals the quantity supplied.

Competitive Markets

Perfect Competition

A perfectly competitive market is one with many buyers and sellers, identical products, and no barriers to entry or exit.

• Firms and consumers are price takers.

• Resources are allocated efficiently in the long run.

Market Equilibrium

Equilibrium Price and Quantity

Market equilibrium is the point where the supply and demand curves intersect.

• Equilibrium Price (Pe): The price at which quantity demanded equals quantity supplied.

• Equilibrium Quantity (Qe): The quantity bought and sold at the equilibrium price.

Equation:

Adjustments to Equilibrium

• If the market price is below equilibrium, there is a shortage (excess demand). Sellers will raise prices.

• If the market price is above equilibrium, there is a surplus (excess supply). Sellers will lower prices.

Changes in Demand and Supply

Change in Demand vs. Change in Quantity Demanded

• Change in Demand: The entire demand curve shifts due to factors other than price (e.g., income, tastes).

• Change in Quantity Demanded: Movement along the demand curve due to a change in the good's own price.

External Factors That Shift Demand Curves

• Change in price of related goods & services

• Change in income

• Change in tastes & preferences

• Change in expectations

• Change in the number of consumers

Related Goods & Services

Income and Demand

Shifts of the Supply Curve

• Change in input prices

• Change in prices of related goods in production

• Change in technology

• Change in expectations

• Change in the number of producers

Changes in Input Prices

• Input price changes are inversely related to supply.

• Examples: labor costs (wages), maintenance, advertising, electricity, taxes, rent.

Related Goods in Production

Shifts in Curves and Market Outcomes

What Happens When Curves Shift?

• A shift in the demand curve changes equilibrium price and quantity.

• A shift in the supply curve also changes equilibrium price and quantity.

• Simultaneous shifts in both curves can make the effect on price or quantity ambiguous.

Simultaneous Shifts of Supply and Demand

• If both demand and supply increase, quantity increases but the effect on price depends on the relative size of the shifts.

• If demand increases and supply decreases, price rises but the effect on quantity depends on the relative size of the shifts.

Real-World Complications

Market Complexity

• Real markets are affected by expectations, information, and unpredictable events (e.g., weather, consumer habits).

• Economists use models to simplify and analyze these complexities, but real outcomes may differ from theoretical predictions.

Example: A hurricane forecast can shift both demand (for emergency supplies) and supply (due to disrupted logistics), complicating price and quantity outcomes.

Additional info: This summary expands on the provided slides by including definitions, examples, and tables for clarity and completeness.