Demand and Supply

Supply and Demand: A Model of a Perfectly Competitive Market

  • Market Characteristics:

    • Price (P): The amount charged for one unit of a good or service.

    • Quantity (Q): The number of units available for sale.

    • Market Quantity:

    • Market Price is denoted as P*

    • Market Quantity is denoted as Q*

    • Demand (Qd) equals Supply (Qs).

    • Market Features:

    • Numerous buyers and sellers.

    • All units are identical.

    • All units are sold at the same price.

Demand

  • Definition of Demand:

    • Demand is the quantity of a good or service that consumers are willing and able to purchase at various prices.

  • Law of Demand (Ceteris Paribus):

    • If price increases, then quantity demanded decreases.

    • If price decreases, then quantity demanded increases.

  • Demand Curve:

    • The downward slope illustrates the inverse relationship between price and quantity demanded.

    • Linear demand equation:

    • $Q_d = a - b(P)$

    • Example demand estimation:

    • $Q_d = 860 - 200P$

Shifting the Demand Curve

  • Increase in Demand:

    • The entire demand curve shifts to the right, indicating consumers will purchase larger quantities at every price.

  • Decrease in Demand:

    • The entire demand curve shifts to the left, indicating consumers will purchase smaller quantities at every price.

  • Impact of Price Stability:

    • Even without a change in price, the quantity demanded alters due to shifts in demand.

Factors Changes Demand

  • Definition of Demand Shift:

    • A shift in demand occurs when an economic factor (excluding price) leads to a different quantity demanded at all price points.

  • Determinants of Demand:

    • Income: Increases or decreases can shift demand.

    • Changing Tastes or Preferences: Shifts can occur based on consumer trends.

    • Population Changes: An increase or decrease in population affects demand.

    • Price of Substitutes: Changes in the price of substitute goods affect demand.

    • Price of Complements: Changes in the price of complementary goods also affect demand.

    • Future Expectations: Consumer expectations about future prices or economic conditions can shift demand.

Types of Goods and Services

  • Normal Good:

    • A product for which demand increases as income rises, and vice versa.

  • Inferior Good:

    • A product for which demand decreases as income rises, and vice versa.

  • Substitutes:

    • Goods or services used in place of one another.

  • Complements:

    • Goods or services that are used together, enhancing consumption of one when the other is consumed.

Market Demand

  • Concept of Market Demand:

    • Market Demand represents the total quantity demanded across all buyers at each price.

    • Individual demand curves combine to form the market demand curve.

Graphical Representation of Market Demand

  • Graphical Analysis:

    • Individual demand curves for each quantity at respective prices illustrated.

    • As the population of buyers increases, market demand also increases.

Supply

  • Definition of Supply:

    • Supply refers to the amount of a good or service that a producer is willing to supply at various prices.

  • Law of Supply (Ceteris Paribus):

    • If price increases, then quantity supplied increases.

    • If price decreases, then quantity supplied decreases.

  • Supply Curve:

    • The upward slope reflects that higher prices lead to greater quantity supplied.

    • Linear supply equation:

    • $Q_s = c + d(P)$

    • Example supply estimation:

    • $Q_s = 450 + 200P$

Factors Affecting Market Supply

  • Shift in Supply:

    • A shift occurs when a change in an economic factor (not related to price) causes a different quantity supplied at every price.

  • Factors Affecting Supply:

    • Natural Conditions: Weather and environmental factors can impact supply.

    • Input Prices: Fluctuations in the prices of inputs affect production costs.

    • Technology: Technological advancements can increase supply efficiency.

    • Government Policies: Regulations and taxes can influence supply levels.

    • Number of Firms in the Market: More firms typically increase market supply.

Individual Firm’s Supply Curve

  • Marginal Cost (MC):

    • The cost incurred by producing one additional unit. Typically, MC increases with increased production.

Market Supply

  • Concept of Market Supply:

    • Market Supply refers to the total quantity supplied across all sellers at each price level.

  • Graphical Representation of Market Supply Initiatives:

    • Market supply is illustrated with aggregations of individual firms' supply curves.

Factors Affecting Market Supply Dynamics

  • Factors Increasing Market Supply:

    • Entry of more firms into the market.

    • Expectations of decreased prices.

  • Factors Decreasing Market Supply:

    • Exit of firms from the market.

    • Expectations of increased prices.