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

Module II: The Supply and Demand Model

Introduction to Demand and Supply

  • Key topics:

    • Demand, Supply, and Equilibrium in Markets

    • Shifts in Demand and Supply

    • Changes in Equilibrium Price and Quantity

    • Price Ceilings and Price Floors

    • Externalities

The Supply and Demand Model

  • Foundation of market economics.

  • Determines price and quantity of goods.

  • Involves:

    • Demand Curve: Relationship between price and quantity demanded

    • Supply Curve: Relationship between price and quantity supplied

Demand for Goods and Services

  • Definition: Amount consumers are willing to buy at each price.

  • Depends on:

    • Needs vs. Wants

    • Ability to pay (effective demand)

  • Law of Demand: Inverse relationship between price and quantity demanded.

Demand Curve

  • Characteristics:

    • Downward sloping curve

    • A rise in price decreases quantity demanded

    • Example: Higher gasoline prices lead to lower demand.

    • Movements:

      • Along the curve: Change in price

      • Shift of the curve: Other factors

Graphing the Demand Curve

  • Represents inverse relationship.

  • Points on the curve show quantity demanded.

Supply of Goods and Services

  • Definition: Amount producers are willing to sell at different prices.

  • Law of Supply: Positive relationship between price and quantity supplied.

  • Movements:

    • Along the curve: Change in price

    • Shift of the curve: Other factors

Supply Curve

  • Characteristics:

    • Upward sloping curve

    • A rise in price increases quantity supplied

Market Equilibrium

  • Definition: Balance between quantity demanded and supplied.

  • Equilibrium Price: Price at which quantity demanded equals quantity supplied.

  • Disequilibrium: Causes shortages or surpluses.

  • Changes in Equilibrium: A shift in demand or supply alters equilibrium price and quantity.

Shifts in Demand and Supply

  • Changes other than price can shift the entire curve.

  • Right shift: Increase in demand/supply

  • Left shift: Decrease in demand/supply

Factors that Shift Demand

  • Income

  • Consumer preferences

  • Number of buyers

  • Price of related goods: substitutes vs. complements

  • Expectations

  • Examples:

    • Normal goods: Demand increases with income

    • Inferior goods: Demand decreases with increased income

Factors that Shift Supply

  • Production costs

  • Technology

  • Number of sellers

  • Expectations

  • Government policies

Market Failures, Public Goods, and Externalities

  • Market Failure: Inefficient allocation leading to loss of welfare.

  • Externalities: Costs/benefits affecting third parties not in the transaction.

    • Positive: Benefits others (e.g., R&D).

    • Negative: Costs (e.g., pollution).

Conclusion

  • Key topics covered:

    • Demand, Supply, Equilibrium

    • Shifts in curves and their effects

    • Introduction to externalities and market failures.

Upcoming Topics

  • Consumer Surplus, Producer Surplus, Social Surplus

  • Price Controls: Ceilings and Floors

  • Market Failures and Public Goods