Demand and Supply: Markets, Demand, and Equilibrium (Energy Bars Example)

Markets and Prices

A market is any arrangement that enables buyers and sellers to get information and do business with each other.
A competitive market is a market with many buyers and many sellers so no single buyer or seller can influence the price.
The money price of a good is the amount of money needed to buy it.
The relative price of a good—the ratio of its money price to the money price of the next best alternative good—is its opportunity cost.
Markets and prices: the model of demand and supply determines prices and quantities bought and sold; prices adjust to balance plans of buyers and sellers.

Demand

Demand definition: If you demand something, you 1) want it, 2) can afford it, and 3) have made a definite plan to buy it. Wants are unlimited; demand reflects choices about which wants to satisfy.
The quantity demanded (Q_d) is the amount consumers plan to buy during a given time period at a particular price.
The Law of Demand: all else equal, as price falls, quantity demanded rises; as price rises, quantity demanded falls.
- Mathematical intuition: \frac{\partial Q_d}{\partial P} < 0
Why price affects quantity demanded: two effects
- Substitution effect: when relative price of a good rises, people substitute away from it toward alternatives; tends to decrease quantity demanded of the good.
- Income effect: when the price of a good rises relative to income, real purchasing power falls; for a normal good, this reduces quantity demanded; for an inferior good, it can increase quantity demanded.
Demand Curve and Demand Schedule
- Demand refers to the entire relationship between price and quantity demanded.
- A demand curve shows Q_d against price P with other influences held constant (ceteris paribus).
Demand as willingness and ability to pay
- Willingness to pay (marginal benefit) measures how much a consumer values one more unit.
- A demand curve can be viewed as the willingness-and-ability-to-pay curve.
A Change in Demand vs a Movement Along the Demand Curve
- Movement along the demand curve: price changes, other influences unchanged; Q_d changes along the same curve.
- A shift of the demand curve: some influence on buying plans other than the price changes; demand changes, so at every price a different quantity is demanded (curve shifts right for an increase, left for a decrease).
Six main factors that change demand
- Prices of related goods (substitutes and complements)
- Expected future prices
- Income
- Expected future income and credit
- Population
- Preferences
Prices of Related Goods
- Substitutes: goods that can replace each other.
- Complements: goods that are often consumed together.
- If the price of a substitute for energy bars rises, or the price of a complement falls, demand for energy bars increases.
Expected Future Prices
- If a good’s price is expected to rise in the future, current demand increases (demand curve shifts right).
Income
- Normal goods: demand increases as income increases (shift right).
- Inferior goods: demand decreases as income increases (shift left).
Expected Future Income and Credit
- If income is expected to rise or credit is easy to obtain, current demand can rise.
Population
- Larger population increases demand for all goods.
Preferences
- Different tastes and preferences shift demand independently of price.
Energy-bar example: Figure 3.2 shows an increase in demand for a normal good (energy bars) when income increases; demand shifts right.
Demand schedule (illustrative) for energy bars (P in dollars per bar; Q_d in millions of bars per week)
- (P, Q_d) examples: (0.50, 22), (1.00, 15), (1.50, 10), (2.00, 7), (2.50, 5), (3.00, 2)

Demand and Supply of Energy Bars: Numerical Illustration

Demand schedule (illustrative):
- P = 0.50 → Q_d = 22
- P = 1.00 → Q_d = 15
- P = 1.50 → Q_d = 10
- P = 2.00 → Q_d = 7
- P = 2.50 → Q_d = 5
- P = 3.00 → Q_d = 2
Supply schedule (illustrative):
- P = 0.50 → Q_s = 0
- P = 1.00 → Q_s = 6
- P = 1.50 → Q_s = 10
- P = 2.00 → Q_s = 13
- P = 2.50 → Q_s = 15
Equilibrium (where Qd = Qs):
- Equilibrium price: $P^* = 1.50$
- Equilibrium quantity: $Q^* = 10$
Alternative prices and outcomes (illustrative)
- At P = 1.00: Qd = 15, Qs = 6 → shortag e of 9 (Qd > Qs)
- At P = 2.00: Qd = 7, Qs = 13 → surplus of 6 (Qs > Qd)

The Demand Curve in Action: Movements vs Shifts

Movement along the demand curve occurs when the price changes but non-price factors remain constant.
A shift of the demand curve occurs when a non-price factor changes; the entire curve moves to the right (increase) or left (decrease).

Supply

A firm supplies a good if it has the resources and technology to produce it, can profit from producing it, and has a definite plan to produce and sell it.
Resources and technology determine what is feasible to produce; supply reflects the decision about which technologically feasible items to produce.
The quantity supplied (Q_s) is the amount producers plan to sell during a given time period at a given price.
The Law of Supply: other things equal, higher price → greater quantity supplied; lower price → smaller quantity supplied.
The law of supply results from the upward-sloping marginal cost: producing more units increases marginal cost; producers supply if price covers marginal cost.
The supply curve and schedule show the relationship between price and quantity supplied, holding other influences on plans constant.
The supply curve can be viewed as a minimum-supply-price curve: the lowest price at which someone is willing to sell an additional unit equals marginal cost (MC).
A Change in Supply vs a Movement Along the Supply Curve
- Movement along the supply curve: price changes, other influences unchanged; Q_s changes along the same curve.
- A shift of the supply curve: non-price factors change, causing the entire curve to shift right (increase) or left (decrease).
The six main factors that change supply
- The prices of factors of production
- The prices of related goods produced (substitutes in production; complements in production)
- Expected future prices
- The number of suppliers
- Technology
- State of nature
Prices of Factors of Production
- If input prices rise, the minimum price a supplier is willing to accept rises; higher input costs reduce supply and shift left.
Prices of Related Goods Produced
- Substitutes in production: if the price of a substitute in production falls, the supply of the current good increases.
- Complements in production: if the price of a produced complement rises, supply of the current good increases (and vice versa).
Expected Future Prices
- If a good’s price is expected to rise, current supply decreases (leftward shift) because producers hold back today.
The Number of Suppliers
- More suppliers increase supply; fewer suppliers decrease supply.
Technology
- Advances in technology reduce production costs and increase supply (shift right).
State of Nature
- Natural conditions (e.g., weather) affect production; adverse conditions decrease supply (shift left).
Supply schedule (illustrative) for energy bars
- P = 0.50 → Q_s = 0
- P = 1.00 → Q_s = 6
- P = 1.50 → Q_s = 10
- P = 2.00 → Q_s = 13
- P = 2.50 → Q_s = 15

Market Equilibrium

Equilibrium is a situation where opposing forces balance each other.
In a market, equilibrium price is the price at which the quantity demanded equals the quantity supplied; equilibrium quantity is the quantity bought and sold at that price.
Price regulates buying and selling plans; price adjusts when plans don’t match.
An equilibrium is reached when Qd = Qs at price P^* and quantity Q^*.
Example (energy bars): at P^* = 1.50, Q^* = 10 (Qd = Qs = 10 when P = 1.50).

Surplus and Shortage; Price Adjustments

If the price is above equilibrium, a surplus occurs (Qs > Qd); the price tends to fall.
If the price is below equilibrium, a shortage occurs (Qd > Qs); the price tends to rise.
At the equilibrium price, plans of buyers and sellers agree and the price does not change unless demand or supply changes.
Example from energy bars:
- At P = 2.00, Qd = 7 and Qs = 13 → surplus of 6 bars.
- At P = 1.00, Qd = 15 and Qs = 6 → shortage of 9 bars.
- At P = 1.50, Qd = Qs = 10 → no shortage or surplus.

Predicting Changes in Price and Quantity

All possible changes in demand and supply and their effects on equilibrium price and quantity are summarized below.
Increasing or decreasing demand or supply shifts the respective curves and changes the equilibrium:
- A) No change in demand or supply: no change in price or quantity.
- B) Increase in demand: at the original price, a shortage arises; price rises; quantity supplied along the supply curve rises.
- C) Decrease in demand: at the original price, a surplus arises; price falls; quantity demanded falls.
- D) Increase in supply: at the original price, a surplus arises; price falls; quantity demanded increases.
- E) Increase in both demand and supply: equilibrium quantity increases; the change in equilibrium price is indeterminate (depends on relative magnitudes).
- F) Decrease in both demand and supply: equilibrium quantity decreases; the change in equilibrium price is indeterminate.
- G) Decrease in demand and increase in supply: price falls; quantity effect uncertain.
- H) Increase in demand and decrease in supply: price rises; quantity effect uncertain.
- I) Increase in both demand and supply (restate): equilibrium quantity increases; price indeterminate.
- J) Decrease in both demand and increase in supply: (same as G)
All possible cases show that the equilibrium price is determined by the balance of shifts, and the equilibrium quantity by the interaction of new curves.

Key Concepts and Formulas (Summary)

Demand: Q_d is a function of price and other factors; downward-sloping demand curve.
Law of Demand: \frac{\partial Q_d}{\partial P} < 0
Substitution effect: higher relative price leads to substitution away from the good.
Income effect: price change affects real income and thus purchasing power; direction depends on type of good (normal vs inferior).
Demand curve: downward-sloping representation of the relationship between price and quantity demanded.
Willingness to pay: marginal benefits; demand curve reflects WTP across quantities.
Change in Demand vs Movement Along Demand Curve: shift vs movement.
Six determinants of demand: substitutes/complements; expected prices; income; expected income/credit; population; preferences.
Normal vs Inferior goods: income changes affect demand direction.
Supply: Q_s is a function of price and other factors; upward-sloping supply curve.
Law of Supply: \frac{\partial Q_s}{\partial P} > 0
Marginal cost and minimum supply price: MC is the price at which an additional unit is supplied; supply curve reflects MC.
Six determinants of supply: factors of production prices; prices of related goods produced; expected future prices; number of suppliers; technology; state of nature.
Substitutes in production and complements in production: how they affect supply.
Expected prices, number of suppliers, technology, and state of nature: shifts in the supply curve.
Market Equilibrium: Qd = Qs defines equilibrium; P^* is the regulator price.
Surplus and Shortage: differences between Qs and Qd at given price; price adjustments move toward equilibrium.
Energy-bar example demonstrates shifts, equilibria, and price adjustments with concrete numbers for Demand and Supply schedules.
All possible demands and supplies changes show how equilibrium price and quantity respond to factor changes (nine scenarios).

All Possible Demand and Supply Scenarios (Table-style recap)

No change: no change in price or quantity.
Increase in demand: price rises; quantity rises; potential quantity supplied rises along the supply curve.
Decrease in demand: price falls; quantity falls.
Increase in supply: price falls; quantity rises.
Increase in both demand and supply: equilibrium quantity increases; price impact indeterminate.
Decrease in both demand and supply: equilibrium quantity decreases; price impact indeterminate.
Decrease in demand and increase in supply: price falls; quantity ambiguous.
Increase in demand and decrease in supply: price rises; quantity ambiguous.
Increase in both demand and supply (repeated): quantity increases; price indeterminate.

Energy Bars: Quick Reference Values (Illustrative)

Demand (P vs Q_d): (0.50, 22), (1.00, 15), (1.50, 10), (2.00, 7), (2.50, 5), (3.00, 2)
Supply (P vs Q_s): (0.50, 0), (1.00, 6), (1.50, 10), (2.00, 13), (2.50, 15)
Equilibrium: $P^* = 1.50, \quad Q^* = 10$
Surplus example: at $P = 2.00$ , $Qd = 7, Qs = 13$ → surplus of 6 units
Shortage example: at $P = 1.00$ , $Qd = 15, Qs = 6$ → shortage of 9 units
No surplus or shortage: at $P = 1.50$ , $Qd = Qs = 10$