Applied Economics | | Demand and Supply

Microeconomics

is a branch of economics that studies the behavior of individuals and firms.

Microeconomics

The analysis of demand and supply of labor

Microeconomics

Effect on price of a good

Microeconomics

Individual consumer behavior

Microeconomics

Supply of Good

Demand

the desire, willingness, and ability to buy a good or service

Demand

different from “need”

Demand Schedule

shows the amount consumers are willing and able to purchase at each price level for a specified period of time

Other things equal

(ceteris paribus)

Price

This is represented by the vertical axis (Y)

Quantity Demanded

This is represented by the horizontal axis (X)

Demand Curve

This is downward sloping

Law of Demand

Inverse Relationship

Law of Demand

As price falls, quantity demanded rises

Law of Demand

As price rises, quantity demanded falls

Income Effect

→when the price of a good rises

→purchasing power decreases

→buy less, vice versa

Substitution Effect

→when the price of a good rises

→buy less of the goods

→shift to lower-priced substitutes

Taste & Preferences

quality, advertising, brand, fashion changes etc.

Income

Normal goods, Inferior goods

Normal Goods

Income rises, demand rises (Other Determinants of Demand)

Inferior Goods

Income falls, demand rises (Other Determinants of Demand)

Price of Related Goods

Substitute goods, Complementary goods

Substitute Goods

two goods for which an increase in the price of one leads to an increase in the demand for the other.

Complementary Goods

two goods for which an increase in the price of one leads to a decrease in the demand for the other.

Number of Buyers

the more buyers the greater the demand

Price Expectations

Price up, Demand up; Price down, Demand down

Consumers retime their purchases

Up

(Price Expectations) Expect the price to go _____, the demand will go up

Down

(Price Expectations) Expect the price to go _____, the demand will go down

Demand Function

Is the mathematical expression of the negative (inverse) relationship between the quantity demanded and prices.

Qd = f(P, T, I, R, N, E)

Formula of Complete Demand Function

Linear Demand Function (Equation)

Represents the relationship of price to Qd

Qd = a - b (p)

Equation for Linear Demand Function

Changes in Quantity Demand

refers to movements along a given demand curve due to a change in price

Changes in Demand

refers to shifts in the demand curve due to a change in any of the other determinants of demand.

Market Demand

the sum of all individual demands for a particular good or service

Market Demand

the horizontal summation of the individual demand curves of all of the consumers in the market

Supply

refers to the various quantities of a good or service that producers are willing to sell at all possible market prices

Supply Schedule

shows the amount producers plan to sell at each price level for a specified period of time

Individual Supply

• The quantity of products that a producer wishes to sell at a particular price and at a particular time

• Price of inputs, technology, price of related goods, taxes, and subsidies and the price of own good influences the individual supply

Market Supply

• The quantity of products that all producers wish to sell together at 2 particular prices and times.

• All the factors affecting individual supply and the number of firms available influence the market supply

Supply Curve

a graphical illustration of supply schedule and the correlation between the cost of a good or service and the quantity supplied for a given period. (intuitive relationship bet P and Qs).

Supply Curve

Shows how much sellers will supply at different prices

Supply Curve

Upward Sloping

Law of Supply

As price rises, quantity supplied rises

Law of Supply

As price falls, quantity supplied falls

Supply Function

is a mathematical equation of the positive relationship between the price and quantity supplied.

Qs = f(P, R, T, TS, N, O, E)

Formula of Complete Supply Function

Linear Supply Function (Equation)

Represent the relationship of P to Qs

Qs = c + dP

Equation for Linear Supply Function

Market Supply

the sum of all the individual supply for a particular good or service

Market Supply

the horizontal summation of the individual supply curves of all of the producers in the market.

Changes in Quantity Supply

refers to movements along a given supply curve due to a change in price.

Changes in Supply

refers to shifts in the supply curve due to a change in any of the other determinants of supply