Demand and Supply Analysis
Basic Concepts of Demand and Supply Analysis
Understand key concepts of demand and supply.
Write a demand and supply analysis logically and consistently.
Draw a well-labeled demand and supply diagram.
Calculate equilibrium price and quantity from given equations.
Key Distinctions
Differentiate between quantity demanded and demand, and determinants of demand.
Differentiate between quantity supplied and supply, and determinants of supply.
Market Equilibrium
Understand the nature of market equilibrium.
Explain how demand and supply determine equilibrium price and quantity.
Explain the effects of changes in demand and supply.
Competitive Markets
Market: Arrangement bringing buyers and sellers together.
Market Structure: Organizational characteristics of a market.
Types: Perfectly Competitive Market, Monopoly, Monopolistic Competition, Oligopoly.
Assumptions of Perfect Competition
Many buyers and sellers.
Products are identical.
Perfect information.
Free entry and exit.
No individual influence on price.
Demand
Comes from buyer behavior.
Reflects the relationship between quantity demanded and price, holding other influences constant.
Illustrated by a demand schedule or curve.
Quantity Demanded
Amount buyers are willing and able to buy at a specified price during a period.
Represented by a point on the demand curve.
Law of Demand
Demand curve is downward sloping.
As price rises, quantity demanded decreases, and vice versa (ceteris paribus).
Market Demand
Sum of all buyers' demands in a market.
Market demand curve is the horizontal sum of individual demand curves.
Supply
Comes from seller behavior.
Reflects the relationship between quantity supplied and price, holding other influences constant.
Illustrated by a supply schedule and curve.
Quantity Supplied
Amount sellers are willing and able to sell at a specified price during a period.
Represented by a point on the supply curve.
Law of Supply
Supply curve is upward sloping.
As price rises, quantity supplied increases, and vice versa (ceteris paribus).
Market Supply
Sum of all sellers' supplies in a market.
Market supply curve is the horizontal sum of individual supply curves.
Market Equilibrium
Occurs when quantity demanded (Qd) equals quantity supplied (Qs).
Equilibrium price (Pe): Price at which Qd = Qs.
Equilibrium quantity (Qe): Quantity bought and sold at Pe.
Price as Regulator
Surplus: Quantity supplied exceeds quantity demanded; price falls to equilibrium.
Shortage: Quantity demanded exceeds quantity supplied; price rises to equilibrium.
Equilibrium Checkpoint
Equilibrium: Price where quantity demanded equals quantity supplied.
If price is above equilibrium, there's a surplus; if below, a shortage.
Mathematical Application
At equilibrium, .
Change in Quantity Demanded vs. Change in Demand
Change in quantity demanded: Movement along the demand curve due to price change.
Change in demand: Shift of the demand curve due to other factors changing.
Factors Affecting Demand
Prices of related goods (substitutes and complements).
Change in income (normal and inferior goods).
Expected future prices.
Expected future income and credit.
Number of buyers.
Buyers’ preferences.
Substitutes
A good that can be consumed in place of another.
If the price of a substitute rises (falls), the demand for a good increases (decreases).
Complements
A good that is consumed with another good.
If the price of a complement falls (rises), the demand for a good increases (decreases).
Normal vs. Inferior Goods
Normal Good: Demand increases (decreases) as income increases (decreases).
Inferior Good: Demand decreases (increases) as income increases (decreases).
Factors Increasing Demand
Substitute price rises.
Complement price falls.
Income rises (normal good).
Income falls (inferior good).
Expected future price rises.
Expected future income and credit.
Number of buyers increases.
Favorable change in preferences.
Factors Decreasing Demand
Substitute price falls.
Complement price rises.
Income falls (normal good).
Income rises (inferior good).
Expected future price falls.
Expected future income and credit decreases.
Number of buyers decreases.
Unfavorable change in preferences.
Change in Quantity Supplied vs. Change in Supply
Change in quantity supplied: Movement along the supply curve due to price change.
Change in supply: Shift of the supply curve due to other factors changing.
Factors Affecting Supply
Prices of related goods.
Prices of resources.
Expected future prices.
Number of sellers.
Technology.
Substitutes in Production
Goods produced in place of each other.
If the price of a substitute in production falls (rises), the supply of a good increases (decreases).
Complements in Production
Goods produced along with each other.
If the price of a complement in production rises (falls), the supply of a good increases (decreases).
Factors Increasing Supply
Substitute in production price falls.
Complement in production price rises.
Resource prices fall.
Expected future price falls.
Number of sellers increases.
Technology advances.
Factors Decreasing Supply
Substitute in production price rises.
Complement in production price falls.
Resource prices rise.
Expected future price rises.
Number of sellers decreases.
Productivity decreases.
Ceteris Paribus
"Other things equal"; assuming all other variables are held constant.