Demand and Supply Summary
Demand and Supply
Competitive Market
A market with numerous buyers and sellers, where no single entity can influence the price.
Price
Money Price: The amount of money needed to buy a good.
Relative Price: The ratio of a good's money price to the next best alternative, representing its opportunity cost.
Demand
To demand something, you must want it, be able to afford it, and have a plan to buy it.
Quantity Demanded: The amount consumers plan to buy at a specific price during a period.
Law of Demand
As the price of a good increases, the quantity demanded decreases, and vice versa, all other things being equal.
Substitution Effect: As a good's relative price rises, people seek substitutes, reducing quantity demanded.
Income Effect: As a good's price rises relative to income, people can't afford as much, reducing quantity demanded.
Demand Curve
Shows the relationship between quantity demanded and price, assuming other influences remain constant.
Also represents willingness and ability to pay, reflecting marginal benefit.
Changes in Demand
Occur when factors other than price influence buying plans, shifting the entire demand curve.
Factors include prices of related goods (substitutes and complements), expected future prices, income (normal and inferior goods), expected future income/credit, population, and preferences.
Shifts vs. Movements
Movement along the curve: Price change.
Shift of the curve: Change in other factors.
Supply
A firm supplies if it has resources/technology, can profit, and plans to produce/sell.
Quantity Supplied: The amount producers plan to sell at a particular price during a period.
Law of Supply
As the price of a good increases, the quantity supplied increases, and vice versa, all other things being equal.
Reflects increasing marginal cost of production.
Supply Curve
Shows the relationship between quantity supplied and price, assuming other influences remain constant.
Also indicates the minimum supply price, representing marginal cost.
Changes in Supply
Occur when factors other than price influence selling plans, shifting the entire supply curve.
Factors include prices of factors of production, prices of related goods produced (substitutes and complements in production), expected future prices, number of suppliers, technology, and state of nature.
Shifts vs. Movements
Movement along the curve: Price change.
Shift of the curve: Change in other factors.
Market Equilibrium
Equilibrium occurs when opposing forces (supply and demand) balance.
Equilibrium Price: Quantity demanded equals quantity supplied.
Equilibrium Quantity: Quantity bought and sold at the equilibrium price.
Price Adjustments
Surpluses force prices down; shortages force prices up.
Changes in Equilibrium
Changes in demand or supply affect equilibrium price and quantity.
Increase in demand: price rises, quantity increases.
Decrease in demand: price falls, quantity decreases.
Increase in supply: price falls, quantity increases.
Decrease in supply: price rises, quantity decreases.
Changes in both demand and supply lead to predictable quantity changes, but uncertain price changes and vice versa.