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.