CW

Lecture 3 - Demand and Supply

Course Information

  • Course Title: ECON10004: Introductory Microeconomics

  • Semester: 1, 2025

  • Instructor: Eik Swee

  • Department: Department of Economics, University of Melbourne

Markets Overview

  • Definition of a Market:

    • A marketplace where buyers and sellers trade a specific good or service.

    • Buyers represent the demand side, while sellers represent the supply side.

  • Decision to Transact:

    • Buyers and sellers make transactions by weighing Marginal Benefit (MB) against Marginal Cost (MC).

    • Trade occurs when MB is greater than or equal to MC for both parties.

Perfectly Competitive Markets

  • Characteristics:

    • Many buyers and sellers trading identical goods.

    • No product differentiation; competitive due to multiple sellers.

  • Market Power:

    • Individual sellers have no market power and are referred to as "price-takers."

  • Utilization:

    • Perfectly competitive markets serve as a useful benchmark for analyzing other market structures.

Demand

  • Demand Curve Definition:

    • A graphical representation of the quantity demanded at various prices.

  • Behavior of Demand:

    • As prices rise, the quantity demanded generally decreases.

    • The demand curve slopes downward due to inverse price relationship.

Market Demand Illustration

  • Example:

    • Price of ice-cream at $3.00 and $2.50 broken down into individual demands from buyers Catherine and Nicholas.

    • Aggregation of individual demand results in market demand, showcasing how demand can be totaled across different buyers.

Factors Influencing Demand

  • Price:

    • The price of the good itself is a primary factor influencing demand.

  • Income Changes:

    • Income influences demand for normal (positively related) and inferior goods (inversely related).

  • Other Factors:

    • The quality and price of alternative goods.

    • Consumer tastes and preferences.

Law of Demand

  • Inverse Relationship:

    • Quantity demanded decreases as price increases, holding other factors constant.

  • Demand Curve Movement:

    • Price changes lead to movements along the demand curve.

Other Determinants of Demand

  • Price of Other Goods:

    • Substitutes: A rise in the price of one increases demand for the other.

    • Complements: A rise in the price of one decreases demand for the other.

  • Additional Factors:

    • Consumer tastes, opportunity costs, price expectations, and the number of buyers can shift the demand curve.

Supply

  • Market Supply Definition:

    • Summation of supplies from all sellers in the market.

  • Factors Influencing Supply:

    • Price and technology are among several influencing factors.

Law of Supply

  • Positive Relationship:

    • Quantity supplied increases with an increase in price, ceteris paribus.

  • Supply Curve Movement:

    • Price changes result in movements along the supply curve.

Other Determinants of Supply

  • Factors Shifting the Supply Curve:

    • Technology advancements;

    • Changes in input prices;

    • Price expectations.

Market Equilibrium

  • Definition:

    • A state where demand equals supply, resulting in a balance.

  • Trade Clearance:

    • Market clears when buyers and sellers reach an acceptable price and quantity.

  • Graphical Representation:

    • Equilibrium is visually depicted at the intersection of demand and supply curves.

Algebraic Equilibrium Example

  • Demand and Supply Functions:

    • Given: QD = 120 - 20P, QS = 20P.

  • Purpose:

    • Solve for equilibrium price (P*) and quantity (Q*) using the equation QD = QS.