Study Notes on Market Equilibrium and Price Discovery in Microeconomics

Introduction to Microeconomics

The main focus of this class is to understand market equilibrium and price discovery in microeconomics.
The class will be structured in several steps:
- Introduction of supply and demand
- Discussion on supply and demand schedules
- Explanation of supply and demand curves
- Movement along and shifts of the supply and demand curves
- Definition and understanding of equilibrium price and quantity
- Analysis of changes in supply and demand leading to new market equilibrium

Assumption: Markets are competitive, defined by the existence of many buyers and sellers in a homogeneous market.
A demand schedule shows how much consumers are willing to purchase at different price points.
Willingness to Pay: Key concept focusing on different preferences affecting the quantity demanded.
- Example:
- At a price of $2 for cotton, the quantity demanded is 7.1 billion pounds.
- At a lower price of $1, quantity demanded increases to 10 billion pounds.
- General observation: Lower prices increase demand.
Practical Example:
- At $500 for an iPhone, fewer people may buy it compared to when the price drops to $50.

The demand curve is a graphical representation of the demand schedule.
Definition: A curve that indicates the quantity demanded at any price.
Relationship: As price rises, quantity demanded falls; as price falls, quantity demanded rises.
Transition from demand schedule to demand curve involves plotting price against quantity demanded on a graph.

Causes of a Shift:
- An increase in population leads to higher demand at all price levels.
- Example: If population rises, the demand increases from 10 billion to 12 billion pounds of cotton at a price of $1.
Definition of Shift:
- A shift in the demand curve occurs when the quantity demanded changes at any given price, represented by a new curve position (for instance, D1 to D2).

Movement Along: Changes in quantity demanded due to price changes without external factors affecting demand.
- Example: If all factors remain constant and the price decreases from $1.5 to $1, there is a movement along the demand curve indicating increased quantity demanded.
Shift: Triggered by external factors (e.g., population growth, income change) affecting demand at all prices.

Changes in price of related goods:
- Substitutes: Goods that can be substituted for another (e.g., orange juice vs. pineapple juice). A decrease in the price of one results in lower demand for the other.
- Complements: Goods consumed together (e.g., coffee and sugar). Price decrease in one leads to an increase in demand for the other.
Changes in income:
- Normal Goods: Increase in income leads to higher demand (e.g., cars, electronics).
- Inferior Goods: Increase in income leads to lower demand (e.g., margarine).
Changes in taste and preference, demographics, and expectations can also influence demand shifts.

Definition: Supply identifies how much producers are willing to sell at any price.
A supply schedule lists the amount of product that suppliers are willing to sell at various prices.
- Example: At $2, suppliers are willing to provide 11.6 billion pounds of cotton.
Supply Curve:
- Depicts quantity supplied at each price level, reflected on a graph. As price increases, quantity supplied also increases.

Shift Right: Increase in supply, often due to favorable production conditions (e.g., technology advancements, decrease in production costs). Example: New technology implies more cotton can be produced at lower costs.
Shift Left: Decrease in supply.
- Example: Increase in input prices or natural disasters that reduce supply.

Definition: Market equilibrium occurs when the quantity demanded equals the quantity supplied.
- This occurs at an equilibrium price where all willing buyers can purchase and sellers can sell exactly what they desire.
Equilibrium Example: At a price of $1, the quantity demanded and supplied for cotton is equal at 10 billion pounds.

Surplus: Occurs when the quantity supplied exceeds the quantity demanded.
- Example: At $1.5, supply (11.2 billion) exceeds demand (8.1 billion).
Shortage: Occurs when quantity demanded exceeds quantity supplied.
- Example: At $0.75, demand (11.5 billion) exceeds supply (9.1 billion).

Demand Increase: A shift in the demand curve rightward leads to higher prices and quantity.
Supply Decrease: A leftward shift in the supply curve typically results in increased prices and decreased quantities.

Changes can happen concurrently in both demand and supply, producing different outcomes. Understanding the magnitude of these shifts is essential to predicting changes in market equilibrium.
- Example:
- Large demand increase with a small supply decrease results in higher price and higher quantity.
- Large supply decrease with small demand increase results in higher price and lower quantity.

Comprehensive understanding of the supply and demand model and equilibrium assists in analyzing market behaviors and predicting changes in response to various economic conditions.
Further discussion and exploration of these topics will enhance understanding of market dynamics in upcoming Q&A sessions and quizzes.