Econ1101 Chapter 4 Fall 2024 - Spring 2025

Demand and Supply Overview

• Course Information: ECON1101: Principles of Microeconomics for Fall 2024 - Spring 2025

Markets and Competition

• Market Definition: A group of buyers and sellers for a particular good or service.

  • Buyers determine the demand.

  • Sellers determine the supply.

Types of Markets

• Forms of Markets:

  • Highly organized markets, like those for agricultural commodities.

  • Less organized, such as the ice cream market in a town.

Perfectly Competitive Market

• Characteristics of Perfect Competition:

  • Many buyers and sellers, each with negligible impact on price.

  • Homogeneous goods offered for sale.

  • Buyers and sellers are "Price Takers".

  • Perfect information is available to all participants.

  • At market price, buyers can buy and sellers can sell as much as they want.

Demand

• Law of Demand:

  • Ceteris paribus: Inverse relationship between price and quantity demanded.

  • If price rises, quantity demanded falls; if price falls, quantity demanded rises.

  • Demand Function: Relationship between price and quantity demanded.

  • Demand Schedule: Table showing prices and quantities demanded.

  • Demand Curve: Graph illustrating the demand relationship.

Catherine’s Demand Schedule and Demand Curve

• Example Demand Curve for Ice-Cream Cones:

  • At various prices, the quantity of cones demanded decreases as the price increases.

Market Demand

• Market Demand Defined:

  • The sum of all individual demands for a good or service.

  • Market Demand Curve: Created by summing individual demand curves horizontally.

Supply

• Law of Supply:

  • Ceteris paribus: Positive relationship between price and quantity supplied.

  • If price rises, quantity supplied rises; if price falls, quantity supplied falls.

  • Supply Function: Relationship between price and quantity supplied.

  • Supply Schedule: Table indicating prices and quantities supplied.

  • Supply Curve: Graph demonstrating this relationship.

Ben’s Supply Schedule and Supply Curve

• Example Supply Curve for Ice-Cream Cones:

  • At higher prices, the quantity of cones supplied increases.

Market Supply

• Market Supply Defined:

  • The sum of all sellers' supplies of a good or service.

  • Market Supply Curve: Created by horizontally summing individual supply curves.

Equilibrium: Supply and Demand Interaction

• Equilibrium Defined:

  • Market condition where quantity supplied equals quantity demanded.

  • At this point, supply and demand curves intersect.

  • Equilibrium Price: The market price where supply matches demand.

  • Equilibrium Quantity: Quantity at which equilibrium occurs.

Inequilibrium Situations

• Surplus: More quantity supplied than demanded, resulting in downward pressure on price.

• Shortage: More quantity demanded than supplied, causing upward pressure on price.

Shifts in Demand

• Concept of Shifts in the Demand Curve:

  • Increase in Demand: Demand curve shifts right.

  • Decrease in Demand: Demand curve shifts left.

Demand Curve Shifters

• Factors Influencing Demand Shifts:

  • Income

  • Prices of related goods

  • Tastes and preferences

  • Expectations about the future

  • Number of buyers

Demand Shifter Types

• Normal Goods: Demand increases with income.

• Inferior Goods: Demand decreases as income rises.

• Related Goods:

  • Substitutes: Price increase of one leads to demand increase of the other.

  • Complements: Price increase of one leads to demand decrease of the other.

Supply Shifts

• Concept of Shifts in the Supply Curve:

  • Increase in Supply: Supply curve shifts right.

  • Decrease in Supply: Supply curve shifts left.

Supply Shifter Factors

• Variables Influencing Supply Shifts:

  • Input prices (higher input prices decrease supply)

  • Technological advancements that reduce production costs increase supply

  • Expectations about future prices

  • Number of sellers in the market

Differences in Shifts vs. Movements

• Key Differences:

  • Shifts require changes in factors influencing supply and demand (e.g., preferences, prices).

  • Movements along the curve occur due to price changes only.

Combined Shifts and Movements Example

• Market Equilibrium Impact Example:

  • Natural disasters affect supply or demand leading to altered equilibrium prices and quantities.

How Prices Allocate Resources

• Prices are signals guiding the allocation of resources and determining production amounts and distribution.

Conclusion

• Markets generally organize economic activities effectively, but not all are perfectly competitive. Examples include monopolies or limited competition.

Application Problems

• Example question involving complements (bagels and cream cheese) and shifts in equilibrium prices and quantities.