supply_and_demand

Supply and Demand

  • Supply and Demand: Fundamental economic concepts that explain how price and quantity of goods and services are determined in a market.

Emma's Demand for Novels

  • Income Levels and Purchases: A table shows novels Emma would buy at different income levels and prices.

  • Demand Curve: By graphing data on price and quantity demanded, Emma's demand curve for novels can be produced.

Demand Curve Characteristics

  • Demand Curve: Line D1 illustrates how Emma’s demand is influenced by the price of novels at a constant income.

  • Negative Relationship: The demand curve slopes downward as price decreases, resulting in an increase in quantity demanded.

    • Example: At a price of $5, Emma purchases 25 novels; at $10, only 5 novels.

Shifting Demand Curves

  • Income Effect: Changes in Emma's income result in shifts of her demand curve.

    • Curve D1: Represents $30,000 income.

    • Curve D2: Represents $40,000 income – demand increases.

    • Curve D3: Represents $20,000 income – demand decreases.

  • Direction of Shift: Demand shifts right with income increase and left with income decrease.

Calculating the Slope of Demand Curve

  • Slope Calculation:

    • From point (13 novels, $8) to (21 novels, $6) gives a slope of -1/4.

    • Formula: Slope = Change in y / Change in x.

Market Definition

  • Market: A venue where consumers (buyers) and producers (sellers) meet to transact.

  • Equilibrium: A single price clears the market, where both quantity demanded equals quantity supplied.

Demand Basics

  • Quantity Demanded: Amount buyers are willing/able to purchase at set prices.

  • Demand Curve: Function showing quantity demanded at varying prices.

Catherine’s Demand for Pizza

  • Demand Schedule: Lists price per slice of pizza and corresponding quantity demanded.

  • Behavior: As price decreases, quantity demanded increases.

Market Demand Calculation

  • Combine individual demands (Catherine and Nicholas) to create market demand.

  • Example Pricing:

    • At $0.50: Catherine (10), Nicholas (7) = 17 slices.

Demand Curve Shift Factors

  • Demand Curve Types: D1, D2, and D3 demonstrate shifts due to various economic factors.

  • Shift Causes:

    • Income: Higher income can shift curve to the right.

    • Prices of Related Goods: Changes in substitute/complement prices affect demand.

    • Tastes and Preferences: Fads or societal changes can increase or decrease demand.

    • Expectations of Future Prices: Anticipations about price changes can shift current demand.

    • Population: Growth in consumer base also increases demand.

Demand Shifter Types

  • Normal Goods: Demand increases with income growth.

    • Example: First car purchase increases fuel demand.

  • Inferior Goods: Demand decreases with income growth.

    • Example: Less ramen noodle consumption as income rises.

Price of Substitutes and Complements

  • Substitutes: A decrease in the price of one good can decrease demand for its substitute.

    • Example: Lower natural gas prices reduce coal demand.

  • Complements: A decrease in price of one good can increase demand for its complement.

    • Example: Lower computer software prices increase computer demand.

Changes in Expectations and Population

  • Expectations: Anticipations about future prices can shift demand.

  • Population Effects: An increase in population increases the number of consumers and overall demand.

Demand Curve Movement vs. Shift

  • Movement Along the Demand Curve: Due to a change in the price of the good.

  • Shift: Caused by changes in variables other than price.

Supply Considerations

  • Supply Determinants: Factors that can change supply:

    • Input prices, technology, future expectations, number of sellers, opportunity costs.

Opportunity Costs

  • Defined: Potential benefits lost when choosing one alternative over another.

  • Example: Increase in wheat prices raises the opportunity cost of producing other crops like soybeans.

Equilibrium of Supply and Demand**

  • Market Equilibrium: Achieved when supply equals demand, resulting in an equilibrium price and quantity.

Changes in Equilibrium**

    1. Identify curve shifts (supply or demand).

    1. Assess direction of shift (right = increase, left = decrease).

    1. Graphical analysis to find new equilibrium.

Supply and Demand Interaction and Surpluses/Shortages**

  • Shifts in Supply and Demand: Affects equilibrium price and quantity.

    • Surplus: Quantity supplied exceeds quantity demanded.

    • Shortage: Quantity demanded exceeds quantity supplied.

Analysis of Market Conditions**

  • Market Scenarios:

    • Changes in market conditions (like news events) can predict shifts in prices and quantities.

    • Example: COVID-19 may cause an initial shortage of sanitizers.