Economics: Supply and Demand

Demand

Quantity of goods or services consumers are willing and able to purchase

Willing means wanting to buy

Able means afford to buy

Law of Demand: When the price of a good decreases, the quantity demanded increases (vice versa). Have negative relationship 

Shortage — overdemand

Individual Demand

A demand schedule is a table listing the quantity demanded at various prices. 

Demand Curve is also called the Marginal Benefit curve — extra benefit gained from each purchase 

      — extra benefits if the price of a product continues to decrease

*Each consumers have different preferences meaning that the marginal benefits gained//representation on the demand curve differs for each individual

Non-Price factors of Demand

Non-price determinants of demand are ceteris paribus variables — causing a shift in the graph

  1. Income — An increase in income means an increase in demand for normal goods, decrease in income increases demand for inferior goods

  2. Preference — increased popularity of a good meansan increase in demand

  3. Substitute goods — Alternative goods

  4. Complementary goods — Goods that go hand-in-hands. Will buy both goods

  5. Demographic population — Increase in individual demands, and the market demand shifted to the right

Supply

Quantity producers are willing and able to sell at various prices 

Law of Supply: When the price of good increases, the quantity supplied increases (increase profitability, more incentive). Always have a positive relationship or causal

The supply curve slopes upward due to the profitability of a product. The higher the price, the more profit the firm will gain which increase the incentive for companies to produce goods.

Surplus — oversupply

Individual Supply

Supply is concerned with the behavior of sellers

Firms are suppliers of goods and services:

  • firms in the product market

  • sellers in the resource market (machinery for manufacturing)

From Individual Supply to Market Supply

The market supply is the total quantity that firms are willing and able to supply in the market at different possible prices and is given by the sum of all individual supplies of that particular good

MS or SM = Market Supply

Non-Price Factor of Supply

All factors other than price influence changes in the supply curve. Changes are shifts in the supply curve

  1. Resource Price (Cost of Production) — more production cost  makes the product less profitable

  2. Technology — new improved technology is more profitable and increases supply significantly

  3. Price-related goods — if the price of a product between two goods increases, they will switch to supply the more profitable one

  4. Price of joint supply products — can produce two or more products from a single product

  5. Producer expectation — if the future price of a product is expected to decrease, they will produce more of that product in the present to take advantage of the price

  6. Taxes and subsidies — fall in supply with tax, increase in supply with subsidies 

  7. Number of firms — the more firms that produce a good shift the supply of that product to the right

  8. Supply shock — unpredictable events that affect (disrupt) supply

Vertical Supply Curve

  1. There is a fixed quantity of the good supplied because there I no time to produce more of it

  2. There is a fixed quantity of the good because there is no possibility of producing more of it

Movement along and shift in the supply curve

Movement — change in quantity supplied

Change in supply — shift in the supply curve ,, caused due to change in non price factor

Market Equilibrium

State of balance between the different forces (quantity demanded and quantity supplied), no tendency to change as it is already equal (fulfilling needs of both groups) reflected throughout the intersection between the two lines in the graph ,, Intersection between supply and demand, representing the equal needs of supply and demand of a product

☞ represented through the P*

     when the price change, it creates price disequilibrium

Changes in market equilibrium caused by non price determinants of (either) demand or supply curve, forcing markets to adjust into new equilibrium

equilibrium price is also known as market clearing price

SUMMARY: 

Shift in Demand and Supply

Demand: Shift due to changes in preferences, income, price of related goods, and expectation. rightward shift means increase, leftward shift means decrease

Supply: Shift due to production cost, technological changes, taxes.

Movement Along the Demand Curve v Shift in the Demand Curve

Movement along the curve are due to change in price (affect quantity demanded) while shift in curve are due to change in non-price factors (affect demand)

Price

Price is determined by the force of supply and demand (the interaction) in competitive markets serve two important functions (signaling and incentives) to answer what-to-produce and how-to-produce, due to the condition of scarcity

☞ Market price has the function of providing incentive and signalling

Reallocation of resources involve an opportunity cost (a sacrifice of another good in order produce more of one good)

☞ “The Invisible Hand of the Market” used by Adam Smith (father of economics) answers the question of what-to-produce of resource allocation and how-to-produce

  • Firms only supply goods that consumers are willing and able to buy

    • When firms and workers respond to price signals and incentives, there will be a REALLOCATION of labor resources with firms now producing MORE/LESS output with LARGER/SMALLER quantity of labor

  • Consumers only buy goods that producers are willing and able to supply

Efficiency in Competitive Markets

Efficiency means making the BEST possible use of resources. 

Economic Efficiency also known as Allocative Efficiency refers to producing what consumer wants, answering the question of WHAT TO PRODUCE.

Productive Efficiency means producing with the fewest  resources (lowest possible cost) which answers the question of HOW TO PRODUCE