Econ2101-091 Module 1- Week 2-Supply and Demand Models

Principles of Macroeconomics

• Course: Econ 2101-091

• Module: II

• Focus: The Supply and Demand Model, Market Equilibrium

The Supply and Demand Model

Introduction to Demand and Supply

• Key Topics Covered:

  • Demand, Supply, and Equilibrium in Markets

  • Shifts in Demand and Supply

  • Changes in Equilibrium Price and Quantity

  • Price Ceilings and Price Floors

  • Externalities

Introduction to Demand and Supply

• The Supply and Demand model forms the foundation of market economics.

• It describes the determination of price and quantity of goods in a market.

• Key components include:

  • Supply curve

  • Demand curve

  • Key concepts such as price, market, demand, supply, quantity demanded, quantity supplied, equilibrium, disequilibrium, price control, surplus, shortage, consumer surplus, producer surplus, and externalities.

Demand for Goods and Services

Definition of Demand

• Demand: The willingness and ability of consumers to purchase goods/services at each price level.

• Differentiates between needs and wants; ability to pay impacts effective demand.

• Law of Demand: Inverse relationship between price and quantity demanded; as price increases, quantity demanded decreases and vice versa.

The Demand Curve

• Graphing: Demand curve is downward-sloping showing the negative relationship between price and quantity demanded.

• Movements:

  • Along the curve: Changes due to price changes.

  • Shifts in the curve: Caused by factors other than price (e.g., income, preferences).

• Example: If gasoline prices rise, consumers seek alternatives like mass transit.

Supply of Goods and Services

Definition of Supply

• Supply: The quantity of goods/services a producer is willing and able to offer for sale at various prices.

• Law of Supply: Positive correlation between price and quantity supplied; a rise in price encourages an increase in supply.

The Supply Curve

• Graphing: The supply curve is upward-sloping indicating that higher prices lead to increased supply.

• Movements:

  • Along the curve: Changes related to price adjustments.

  • Shifts in the curve: Due to factors such as production costs or technology.

• Example: Rising gasoline prices may prompt firms to expand production and distribution.

Market Equilibrium

Concept of Equilibrium

• Definition: Market equilibrium occurs when quantity demanded equals quantity supplied.

• Results in an Equilibrium Price and Equilibrium Quantity.

• Market Disequilibrium: Situations where prices are above or below equilibrium, resulting in surpluses or shortages.

  • Surplus: Excess supply when price is above equilibrium.

  • Shortage: Excess demand when price is below equilibrium.

Graphing Market Equilibrium

• Intersection of demand and supply curves determines the equilibrium point.

• The Equilibrium Price is effective for quantifying market transactions.

Shifts in Demand and Supply

Causes of Shifts

• Changes in non-price factors shift the entire demand or supply curve.

• Right Shift: Indicates an increase in demand or supply.

• Left Shift: Indicates a decrease.

Factors that Shift Demand

Key Influencers

• Changes in:

  • Income: Higher income typically increases demand for normal goods, while demand for inferior goods may decrease.

  • Consumer preferences: Seasonal or personal preferences can shift demand.

  • Population changes: More buyers increase demand.

  • Related goods: Prices of substitutes and complements can affect demand.

  • Expectations: Predictions about future prices or economic conditions can change current demand.

  • Government Policies: Taxes or subsidies impact demand.

Factors that Shift Supply

Key Influencers

• Changes in:

  • Production Costs: Lower costs can increase supply.

  • Technology: Advances can improve productivity, shifting supply to the right.

  • Number of Sellers: More sellers increase overall supply.

  • Expectations: Future price expectations can affect current supply decisions.

  • Natural Conditions: Weather changes can significantly impact supply levels.

Conclusion

• The principles of demand and supply are crucial to understanding market dynamics.

• Upcoming topics include consumer and producer surplus, price controls, market failures, and externalities.