Econ 101: Demand, Supply, and Equilibrium Study Notes

Econ 101: Demand, Supply, and Equilibrium

Fundamental Concepts in Economics

• Key components in Economics include:

  • Demand

  • Supply

  • Equilibrium (both price and quantity)

  • Framework Elements:

    • Price and quantity of goods

    • Market supply dynamics

    • Market equilibrium definitions

    • Equilibrium quantity and price

    • Market demand characteristics

Market Definition

• Establishing the Market:

  • Example: Rental Housing in Boulder Junction

    • Price ($P$): Represents the rent in Boulder Junction.

    • Quantity ($Q$): Refers to the number of rental units available in Boulder Junction.

  • Example: Single-Family Homes for Sale in Boulder

    • Price ($P$): Describes the home sales price in Boulder.

    • Quantity ($Q$): Indicates the number of homes sold in Boulder.

Drivers of Demand and Supply

• Variability depending on market segments:

  • Different demand and supply drivers variate across sectors.

  • Shocks to demand and supply can substantially impact the market.

  • Example of a market shock (Mortgage Interest Rate Increase):

    • Sales Market: Results in a negative demand shock.

    • Rental Market: Causes a positive demand shock.

Market Demand

• Market Demand Curve:

  • Visual representation indicating at each price, the corresponding quantity demanded.

  • Graph Structure:

    • Y-axis: Price ($P$)

    • X-axis: Quantity ($Q$)

    • Curve: A downward-sloping line labeled $D$.

Economic Principles

Law of Demand

• Statement: As the price of a good increases ($P <br>ightarrow ext{↑}$), the quantity demanded decreases ($Q <br>ightarrow ext{↓}$), ceteris paribus (holding all else constant).

• Visual Result: The demand curve is downward-sloping from the top-left to the bottom-right.

Demand Curve Shifts

• Positive Demand Shocks:

  • Indicated by: Increased remote work, better schools, or lower interest rates.

  • Visual Shift: The Demand curve ($D<em>1$) moves to the right to a new position ($D</em>2$).

  • Effect: For the same price, quantity demanded increases.

• Negative Demand Shocks:

  • Illustrated by: Decreased remote work, poor school performance, or higher interest rates.

  • Visual Shift: The Demand curve ($D<em>1$) moves to the left to a new position ($D</em>2$).

  • Effect: For the same price, quantity demanded decreases.

Market Supply

• Market Supply Curve:

  • Illustrates at each price level, the corresponding quantity supplied.

  • Graph Structure:

    • Y-axis: Price ($P$)

    • X-axis: Quantity ($Q$)

    • Curve: An upward-sloping line labeled $S$.

Law of Supply

• Statement: When the price of a good increases ($P <br>ightarrow ext{↑}$), the quantity supplied increases ($Q <br>ightarrow ext{↑}$), ceteris paribus.

• Visual Result: The supply curve is upward-sloping from the bottom-left to the top-right.

Supply Curve Shifts

• Positive Supply Shocks:

  • Examples: Decreased material costs or construction tax credits.

  • Visual Shift: The Supply curve ($S<em>1$) shifts to the right ($S</em>2$).

• Negative Supply Shocks:

  • Examples: Higher construction wages or supply chain disruptions.

  • Visual Shift: The Supply curve ($S<em>1$) shifts to the left ($S</em>2$).

Market Equilibrium

• Definition: Occurs where the demand ($D$) and supply ($S$) curves intersect.

• Visual Representation:

  • The intersection point is labeled as Equilibrium ($E$).

  • The corresponding values on the axes are Equilibrium Price ($P^<em>$) and Equilibrium Quantity ($Q^</em>$).

Responses to Demand Shocks

• Positive Demand Shock:

  • $D$ shifts right $\rightarrow$ New intersection point at a higher $P$ and higher $Q$.

• Negative Demand Shock:

  • $D$ shifts left $\rightarrow$ New intersection point at a lower $P$ and lower $Q$.

Progress Questions and Responses to Supply Shocks

• Positive Supply Shock:

  • $S$ shifts right $\rightarrow$ Leads to decreased prices ($P ext{↓}$) and increased quantity ($Q ext{↑}$).

• Negative Supply Shock:

  • $S$ shifts left $\rightarrow$ Results in increased prices ($P ext{↑}$) and decreased quantity ($Q ext{↓}$).

Simultaneous Demand and Supply Shocks

• If both shocks occur, one variable becomes indeterminate unless the magnitude of the shifts is known.

• Negative Demand & Negative Supply:

  • Visual: Both curves shift left.

  • Result: Quantity ($Q$) definitely decreases; Price ($P$) response is indeterminate.

• Positive Demand & Negative Supply:

  • Visual: Demand shifts right, Supply shifts left.

  • Result: Price ($P$) definitely increases; Quantity ($Q$) response is indeterminate.

Demand and Supply Drivers

• Focus will be on real estate market characteristics.

• Critical Driver: Population and Demographics (key for residential real estate decisions).