Microeconomics Chapter 3 Notes

Key Definitions

  • Demand: The amount of a good or service that consumers are both willing and able to buy at every possible price in a given time period, ceteris paribus.
  • Quantity Demanded: The amount of a good/service that consumers are both willing and able to buy at a specific price in a given time period, ceteris paribus.
  • Supply: The amount of a good/service that firms are both able and willing to offer for sale at every possible price in a given time period, ceteris paribus.
  • Quantity Supplied: The amount of a good/service that firms are both willing and able to offer for sale at a specific price in a given time period, ceteris paribus.

Changes in Demand and Supply

  • Change in Demand (entire curve shifts):

    • Influenced by:
    1. Change in consumers' income
    2. Change in consumers' tastes/preferences
    3. Change in price of related goods/services
    4. Change in consumers’ future expectations
    5. Change in the number of consumers
    6. Exchange rate fluctuation

  • Change in Quantity Demanded (movement along the curve):

    • Determined by:
    1. Change in price

  • Change in Supply (entire curve shifts):

    • Influenced by:
    1. Change in price of resources or production costs
    2. Change in technology/productivity
    3. Change in producer’s future expectations
    4. Change in the number of producers

  • Change in Quantity Supplied (movement along the curve):

    • Determined by:
    1. Change in price

Demand and Supply Characteristics

  • Downward-Sloping Demand:
    • Due to the law of demand: ceteris paribus, quantity demanded falls when price rises and rises when price falls.
  • Upward-Sloping Supply:
    • Due to the law of supply: ceteris paribus, quantity supplied rises when price rises and falls when price falls.

Equilibrium Price and Quantity

  • Finding Equilibrium:
    • Equilibrium occurs where the demand curve and supply curve intersect.
Effects of Demand and Supply Shifts

  1. Both Demand and Supply Increase:

    • Curves shift right, leading quantity to increase; price may be higher or lower.

  2. Both Demand and Supply Decrease:

    • Curves shift left, leading quantity to decrease; price may be higher or lower.

  3. Demand Increases, Supply Decreases:

    • Demand curve shifts right, supply curve shifts left; price increases but quantity may be either higher or lower.

  4. Demand Decreases, Supply Increases:

    • Demand curve shifts left, supply curve shifts right; price decreases but quantity may be either higher or lower.

The Process of Moving from One Equilibrium to Another

  1. Shift in Demand or Supply:
    • A change in the market causes the demand or supply curve to shift.
  2. Surplus or Shortage at Original Price:
    • Original price causes a mismatch between demand and supply, leading to a surplus or shortage.
  3. Price Adjustment:
    • Prices change in response to the surplus or shortage.
  4. Changes in Quantity Demanded or Supplied:
    • According to the law of demand and supply, quantity adjusts with the price change.
  5. Movement Along One Curve:
    • The curve (demand or supply) that hasn't shifted adjusts as the price changes.
  6. Reaching New Equilibrium:
    • The market stabilizes at a new price and quantity where quantity demanded equals quantity supplied.