MS

Microeconomics - Demand, Supply, and Market Equilibrium

Microeconomics: Demand, Supply, and Market Equilibrium

Overview of Topics

  1. Introduction to Markets

  2. Demand

    • Demand Schedule and Demand Curve

    • Law of Demand

    • Changes in Demand

    • Determinants of Demand

  3. Supply

    • Supply Schedule and Supply Curve

    • Law of Supply

    • Changes in Supply

    • Determinants of Supply

  4. Market Equilibrium

    • Equilibrium Price and Quantity

    • Rationing Function of Prices

  5. Changes in Demand and Supply

  6. Government-Set Prices

    • Price Ceiling

    • Price Floor

  7. Last Word: Pandemic Prices

1. Introduction to Markets

  • Markets are defined as interactions between buyers and sellers.

  • Types of markets include:

    • Local

    • National

    • International

  • Price is established through the interactions of buyers and sellers.

2. Demand

2.1 Demand Schedule and Demand Curve

  • Definition: A schedule or curve that shows the various amounts of a product that consumers are willing and able to purchase at each of a series of possible prices during specified periods of time:

    • Demand Schedule: A table showing quantities demanded at various prices.

    • Demand Curve: A graph illustrating the demand schedule.

  • Assumptions in determining demand:

    • Other things equal.

    • Individual demand versus market demand.

2.2 Law of Demand

  • Statement: Other things equal, as price falls, the quantity demanded rises; conversely, as price rises, the quantity demanded falls.

  • Explanations for the Law of Demand:

    • Price acts as an obstacle to buyers.

    • Law of diminishing marginal utility.

    • Income effect and substitution effect.

2.3 Changes in Demand

  • Market Demand for Gasoline Example: Data is illustrated showing the quantity demanded at different prices by three buyers—Joe, Jen, and Jay. Example prices and quantities are:

    • At $5: 10 (Joe) + 12 (Jen) + 8 (Jay) = 30

    • And so on for other prices.

2.4 Determinants of Demand

  • Factors influencing demand include:

    1. Change in consumer tastes and preferences.

    2. Change in the number of buyers.

    3. Change in income:

    • Normal goods: Demand increases as income increases (e.g., restaurant meals).

    • Inferior goods: Demand decreases as income increases (e.g., bus passes).

    1. Change in prices of related goods:

    • Substitutes: E.g., a decrease in the price of tea increases the demand for coffee.

    • Complements: E.g., a decrease in the price of printers increases the demand for ink cartridges.

    1. Change in consumer expectations about future prices and income.

3. Supply

3.1 Supply Schedule and Supply Curve

  • Definition: A schedule or curve that illustrates the various amounts of a product that producers are willing and able to make available for sale at each of a series of possible prices during a specified period of time:

    • Supply Schedule: A table detailing quantities supplied at different prices.

    • Supply Curve: A graph representing the supply schedule.

3.2 Law of Supply

  • Statement: Other things equal, as the price rises, the quantity supplied rises; as the price falls, the quantity supplied falls.

  • Explanation: Price acts as an incentive to producers; however, costs may rise as production increases.

3.3 Changes in Supply

  • Changes are represented graphically in supply curves indicating increases or decreases in supply due to various factors.

3.4 Determinants of Supply

  • Major determinants include:

    1. Change in resource prices.

    2. Change in technology (advancements may increase production efficiency).

    3. Change in taxes and subsidies affecting operational costs.

    4. Change in prices of other goods (when resources are interchangeable).

    5. Change in producer expectations about the future market.

    6. Change in the number of sellers in the market.

4. Market Equilibrium

  • Definition: Equilibrium is reached when supply matches demand, which occurs at the intersection of the demand curve and supply curve.

  • Concepts Include:

    • Equilibrium price and equilibrium quantity.

    • Surpluses and shortages at prices above or below equilibrium.

    • Rationing function of prices aids in the efficient allocation of resources.

4.1 Efficient Allocation

  • Productive Efficiency: Achieved when goods are produced in the least costly method while utilizing the best technology and appropriate resource mix.

  • Allocative Efficiency: Focuses on producing the right mix of goods that society highly values.

5. Changes in Demand and Supply

  • Changes in demand or supply can cause shifts in equilibrium price and quantity.

  • Graphical representation shows the effects of increases and decreases in both demand and supply on equilibrium.

6. Government-Set Prices

6.1 Price Ceiling

  • Definition: A price ceiling is a legally established maximum price set below the equilibrium price, leading to potential shortages and creating rationing problems, often resulting in black markets.

  • Example: Rent control policies.

6.2 Price Floor

  • Definition: A price floor is a legally established minimum price set above the market price, resulting in chronic surpluses.

  • Example: Minimum wage laws.

7. Last Word: Pandemic Prices

  • The COVID-19 pandemic triggered numerous economic consequences, notably:

    • Shortages resulting from sudden increased consumer demand for essential commodities.

    • Price stabilization efforts amidst rising demand and insufficient supply.

    • Other effects included stock market crashes, spikes in used car prices, and increased housing demand in less populated areas.