Principles of Economics: The Market Forces of Supply and Demand

Markets and Competition

• Market: Group of buyers and sellers for a specific good/service.
• Buyers: Influence demand.
• Sellers: Influence supply.
• Competitive Market: Many buyers and sellers with negligible impact on prices.
• Perfect Competition: Characteristics include:
  • Identical goods offered for sale.
  • Many buyers and sellers so that no one influences the price (price takers).

Demand

• Quantity Demanded: Amount buyers are willing and able to purchase.
• Law of Demand: As price rises, quantity demanded typically falls.
  • Illustrated by the downward sloping demand curve.

Demand Schedule

• Demand Schedule: Table showing the relationship between price and quantity demanded.
  • Example: Helen's demand for lattes shows decreasing quantity as price increases:
    | Price of Lattes | Quantity Demanded |
    |-----------------|------------------|
    | $0.00 | 16 |
    | $1.00 | 14 |
    | $2.00 | 12 |
    | $3.00 | 10 |
    | $4.00 | 8 |
    | $5.00 | 6 |
    | $6.00 | 4 |

Market Demand

• Total quantity demanded at each price by all consumers in the market is the sum of individual demands:
  • Example with Helen and Ken in the latte market.

Demand Curve Shifters

• Quantity demanded shifts due to non-price determinants:
  • Number of Buyers: Increase in buyers shifts demand curve to the right.
  • Income: Normal goods have increased demand with higher incomes; inferior goods have decreased demand.
  • Prices of Related Goods:
  • Substitutes: Price decrease in one decreases demand for another.
  • Complements: Price decrease in one increases demand for another.
  • Taste and Preferences: Changes can increase or decrease demand.
  • Expectations: Future expectations can affect current demand.

Supply

• Quantity Supplied: Amount sellers are willing to sell at a specific price.
• Law of Supply: Quantity supplied generally increases with increased prices.

Supply Schedule

• Supply Schedule: Table showing relationship between price and quantity supplied for a product.
  • Example: Starbucks' supply of lattes.

Market Supply vs. Individual Supply

• Market supply is the total of all sellers' supplies at each price.

Supply Curve Shifters

• Supply shifts due to:
  • Input Prices: Lower input prices result in increased supply.
  • Technology: Advances can lower costs and increase supply.
  • Number of Sellers: More sellers typically mean greater supply.
  • Expectations: Future price expectations can also affect current supply.

Supply and Demand Together

• Equilibrium: Occurs where quantity supplied equals quantity demanded.
• Equilibrium Price: Price equating quantity supplied and demanded.
• Surplus: Occurs when quantity supplied exceeds quantity demanded. Sellers reduce prices to eliminate surplus.
• Shortage: Occurs when quantity demanded exceeds quantity supplied. Sellers increase prices to reduce shortages.

Analyzing Changes in Equilibrium

1. Identify if the event shifts the supply or demand curve.
2. Determine the direction of the shift.
3. Use diagrams to view how shifts change equilibrium price and quantity.

Control on Prices

• Price Ceiling: Legal maximum price of a good.
  • Not binding if above equilibrium price (no market effect).
  • Binding if below equilibrium price, leading to shortages.
• Price Floor: Legal minimum price.
  • Not binding if below equilibrium price (no market effect).
  • Binding if above equilibrium price, leading to surpluses.

Key Takeaways

• Buyers and sellers determine market outcomes through interaction of supply and demand.
• Demand decreases as prices rise, while supply increases.
• Market equilibrium is essential for stability in prices and quantities.
• Price controls can cause unintended market consequences such as shortages or surpluses.