Microeconomics: Demand & Supply & Equilibrium

Demand

the quantity of a good or service that consumers are willing and able to buy at each given price level during a particular time period, ceteris paribus.

The law of demand

the claim that, ceteris paribus, the quantity demanded of a good falls when the price of the good rises

Demand Curve…

negative relationship/correlation, curve starts high then goes down (Demand goes Down!)

Market Demand Curve

The sum of all individual demand for a good or service.

Complementary Goods

Goods or services that are jointly demanded.

Substitute Goods

Goods or services that compete against each other and are hence in competitive demand.

Movement

A change in price changes the quantity

Shift

A change in a non-price determinant changes the quantity

non-price determinants of demand

Households Income (normal and inferior goods)

Preferences and tastes

Price of substitute goods

Price of complementary goods

Demographic (Number of consumers).

Future price expectations.

Supply

the amount of goods or services that companies are willing and able to supply to the market for sale at each given price level, for a certain period, ceteris paribus.

The law of supply

There is a positive relationship between price and quantity supplied over a particular time period and its price, ceteris paribus. If the price increases, the quantity of goods supplied also increases. Positive relationship between the variables price and quantity.

Supply curve…

positive relationship/ correlation the curve goes upwards (supply to the sky!)

Joint Supply

Joint supply of two or more products refers to production of goods that are derived from a single product, so that it is not possible to produce more of one without producing more of the other.

Competitive Supply

The production of one product compete with the specific resources required to produce more of others.

Non price determinants of supply

• Changes in factors of productiom (example raw material prices)

• Technology improvements Producer (firm) expectations.

• Indirect taxes and Government subsidies

• Regulation and bureaucracy

• Wage rates

• Expectations about future prices

• Number of firms.

• Unpredictable events. Other things could be a bumper harvest, new discoveries of oil or precious metals etc

Equilibrium

The point where supply and demand meet is called market equilibrium, and is when the exact same amount of goods/services demanded is also supplied. Unless otherwise stated, we assume markets are always at this point

Shortage

When there is excess demand for a good or service.

Surplus

When there is excess supply for a good or service.

Price Mechanism

The interactions between consumers and producers that allocate resources and determines prices of goods and services.

Signalling Function

Provides information to consumers and producers on where resources should be allocated.

Incentive Function

Provides motivation for consumers and producers to change their behavior to maximize profits.

Rationing Function

Ensures scarce goods and services deter consumers by raising prices.

Consumer Surplus

The gain of all consumers who can consume a product at a lower price than what they were willing and able to pay.

Producer Surplus

The gain of all producers who can produce a product at a higher price than what they were willing and able to earn.

Social Surplus

The sum of consumer and producer surplus.

Allocative Efficiency

The social optimum when resources are distributed in the most effective and beneficial way.

Market Failure

The inability of the free market to achieve allocative efficiency.