ch-02

Chapter 2: Supply and Demand

Learning Objectives

• 2.1 Demand: Understanding what influences consumer purchasing decisions.

• 2.2 Supply: Recognizing factors that affect how much goods firms are willing to provide.

• 2.3 Market Equilibrium: Evaluating the point where supply and demand intersect.

• 2.4 Shocking the Equilibrium: Exploring how changes can disrupt market balance.

• 2.5 Effects of Government Interventions: Analyzing the impact of policies on markets.

• 2.6 When to Use the Supply-and-Demand Model: Identifying appropriate scenarios for applying the model.

Demand

Determinants of Demand

• Consumers decide on the quantity of goods/services to purchase based on:

  • Tastes: Preferences can vary with trends.

  • Information: Knowledge about products influences choices.

  • Prices of Other Goods: Availability of substitutes or complements.

  • Income: Changes in financial status affect buying capacity.

  • Government Regulations: Policies and laws impact demand levels.

  • Other Factors: Such as seasonal changes or consumer expectations.

Demand Curve

• Quantity Demanded: The amount consumers are willing to buy at a specific price, assuming other factors remain constant.

• Demand Curve: Graphical representation showing quantity demanded at various prices.

Law of Demand

• Law of Demand: When the price of a good falls, quantity demanded increases, all else being equal.

Effects of Other Factors on Demand

• Substitutes: Goods consumed in place of another (e.g., butter and margarine).

• Complements: Goods consumed together (e.g., cars and gasoline).

• Movement vs. Shift: Price change causes movement along the demand curve; other factors cause shifts in the curve.

  • Movement: Change in quantity demanded due to price change.

  • Shift: Change in demand due to factors like income changes or preferences.

Demand Function

• Demand function incorporates:

  • Q: Quantity demanded (millions of tons/year)

  • p: Price of the good (dollars per lb)

  • Other prices and income: Affecting overall demand.

• Example function: Q = 8.56 - 0.3p - 0.1Y.

Supply

Determinants of Supply

• Firms decide how much of a good to supply based on:

  • Costs of Production: Higher costs can decrease supply.

  • Government Regulations: Compliance can affect supply levels.

Supply Curve

• Quantity Supplied: The amount firms are willing to sell at a specific price, assuming other factors remain constant.

• Supply Curve: Graph shows quantity supplied at various price levels.

Summing Demand and Supply Curves

• Total quantity demanded/supplied at each price is the aggregate sum of individual demand/supply.

Market Equilibrium

• Equilibrium: Price point where quantity demanded equals quantity supplied.

• Equilibrium Price: Price at which consumers buy and sellers sell seamlessly.

• Equilibrium Quantity: Volume at which demand meets supply.

• Disequilibrium: When quantity demanded does not equal quantity supplied, leading to excess demand or supply.

Shocking the Equilibrium

• Equilibrium changes due to:

  • Shifts in demand/supply curves from changes in consumer tastes, incomes, costs, or regulations.

Effects of Government Interventions

• Interventions can shift demand/supply curves or create differences between supply and demand.

  • Supply Policies: Licensing, quotas.

  • Demand Policies: Price ceilings, price floors.

When to Use the Supply-and-Demand Model

• Applicable when:

  • Markets are perfectly competitive.

  • Firms sell identical products.

  • Full information about prices and quality is available.

  • Trading costs are low.

Applications in Real Scenarios

• Illustrations of effects such as price ceilings in markets demonstrate theoretical principles in practice.