Macroeconomics: Demand and Supply Summary

Demand and Supply Overview

Key Concepts

• Demand Function: $Q_d = f(…)$

• Supply Function: $Q_s = f(…)$

• Equilibrium Condition: $Qs = Qd$

Demand

• Quantity Demanded (Qd): Amount of a good a household buys at current market price.

• Determinants of Demand:

  • Price (Law of Demand): Inverse relationship between price and quantity demanded.

  • Income: Normal vs. inferior goods.

  • Wealth: Household assets.

  • Expectations: Anticipated changes.

  • Prices of other goods: Substitutes and complements.

  • Tastes/Preferences.

• Change vs. Movement:

  • Change in price -> Movement along the curve.

  • Change in other factors -> Shift of the curve.

Supply

• Quantity Supplied (Qs): Amount firms are willing to sell at a price.

• Determinants of Supply:

  • Price (Law of Supply): Positive relationship between price and quantity supplied.

  • Cost of Production: Technology, input prices.

  • Prices of other products.

• Change vs. Movement:

  • Change in price -> Movement along the curve.

  • Change in influences -> Shift of the curve.

Market Equilibrium

• Condition of Equilibrium: No tendency for price or quantities to change when $Qs$ equals $Qd$.

• Excess Demand (Shortage): Price rises when demand exceeds supply.

• Excess Supply (Surplus): Price falls when supply exceeds demand.

Rationing Mechanisms

• Price Rationing: Allocation process when quantity demanded exceeds supplied.

• Alternative Mechanisms:

  • Price Ceilings: Prevent prices from rising to equilibrium (leading to shortages).

  • Price Floors: Prevent prices from falling to equilibrium (leading to surpluses).

  • Examples: Minimum wage, Dairy price supports.

Adjustments in Equilibrium

• Changes in Equilibrium: Shifts in supply/demand curves alter equilibrium price and quantity.

• Consequences of Price Controls:

  • Queuing, favored customers, ration coupons, black markets as alternative rationing methods for excess demand/supply.