Supply and Demand Overview
Introduction to Demand, Supply & Market Equilibrium
Supply
Definition of Supply
The quantity of a good or service that producers are willing to offer for sale at various prices over a specified period.Example: High ice cream prices lead to more production, lower prices reduce output.
Law of Supply
A positive relationship between price and quantity supplied:
Supply Schedule and Curve
Supply Schedule: A table showing quantities supplied at different prices.Supply Curve: A graph representing how much of a product will be sold at various prices; slopes upward indicating that higher prices encourage more supply.
Supply Equation
Supply Equation Formula
Qs = a + bp
Determinants of Supply
Factors affecting supply include:
Movement vs Shift in Supply Curve
Movement Along Supply Curve
Change in quantity supplied due to price change.
Shift of Supply Curve
Change in supply conditions leading to a new relationship between price and quantity supplied.
Market and Individual Supply
Market supply is the sum of individual supplier quantities at each price.Graphically, the market supply curve is created by horizontally adding individual supply curves.Example: Ben and Jerry's total supply at $2.00 is 7 cones (3 from Ben and 4 from Jerry).
Equilibrium in the Market
Definition of Equilibrium
Exists when quantity supplied matches quantity demanded; there’s no pressure for price to change.
Conditions in Markets
Excess Demand: Quantity demanded > quantity supplied.
Excess Supply: Quantity supplied > quantity demanded.
Equilibrium: Quantity supplied = quantity demanded.
Equilibrium Price and Quantity
Equilibrium Equation
Basic formula: Qs = a + bp = Qd = a - bpConnects supply and demand equations.
Excess Demand and Surplus
Excess Demand Explanation
When quantity demanded exceeds quantity supplied, prices tend to rise.Price adjustments lead to a return to equilibrium:
Surplus Explanation
Occurs when quantity supplied exceeds quantity demanded.Price tends to fall until equilibrium is restored.
Changes in Equilibrium
Supply and demand shifts affect equilibrium price and quantity.Three Steps for Analyzing Changes:
Identify if the event shifts supply, demand, or both.
Determine the direction of the shift.
Use the supply and demand graphs to find new equilibrium.
Market and Resource Allocation
Role of Markets
Markets address fundamental economic questions: what, how, and who gets what produced.Firms produce what is profitable, guided by consumer demand and market prices.
Resource Flow
Resources move towards profit opportunities dictated by supply and demand interactions.
Price Rationing Mechanisms
Definition and Operation
Price rationing allocates limited goods/services when demand exceeds supply.Market prices adjust until equilibrium is achieved.
Constraints and Alternatives
Alternative rationing mechanisms, such as price ceilings, can lead to shortages and excess demand.
Non-price Rationing
Mechanisms
Queuing: Waiting in line to purchase products.
Welfare considerations: Special treatment for favored customers, ration coupons, etc.
Price Floors
Minimum price imposed above equilibrium can cause surplus (excess supply).Example: Minimum wages leading to unemployment.
Market Efficiency and Surplus
Consumer Surplus
Difference between the maximum price a consumer is willing to pay and the market price.
Producer Surplus
Difference between market price and production costs.
Deadweight Loss
Loss of economic efficiency due to under- or overproduction.
Quantity Restrictions and Market Adjustments
Government regulations (licenses) can limit market entries, affecting wages and prices.As demand for services rises, adjusted prices reflect limited supply availability.
Conclusion
Understanding supply, demand, equilibrium, and market functioning is crucial for economic analysis.Recognizing how these elements interact helps stakeholders make informed decisions in the marketplace.
Knowt
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