Microeconomics: Supply and Demand

Key concepts

• Market equilibrium occurs where the quantity consumers demand equals the quantity producers supply. This is the intersection of the demand curve (D) and the supply curve (S).
• At any given price p, there is a quantity demanded (Qd) and a quantity supplied (Qs). If the price is p₂, you can identify Qd and Qs on the respective curves, but the actual traded quantity at that price is the equilibrium quantity, which occurs where Qd = Qs.
• Shifts vs. movements:
  • A shift in a curve means the entire curve moves left or right due to a non-price determinant (an exogenous factor).
  • A movement along a curve happens when the price changes but the curve itself does not shift.
  • Increase in supply is a rightward shift of the supply curve (S → S′). An “up” movement along the curve is not a shift.
• When only one curve shifts (either demand or supply), the direction of the price and quantity changes follows predictable rules. When both curves shift, the outcome depends on which shift is larger in magnitude; if the problem does not specify magnitudes, you cannot determine the exact final price and quantity with certainty.
• If demand shifts left (decrease in demand) and supply shifts right (increase in supply) at the same time, the price tends to fall, while the quantity is indeterminate without magnitude information.
• Real-world intuition for shifts:
  • Demand shifters include income (normal vs inferior goods), prices of related goods, tastes, expectations, and number of buyers.
  • Supply shifters include input prices, technology, number of sellers, expectations about future prices, and related input/output prices.
• Inferior vs. normal goods: a decrease in income increases demand for inferior goods, while it decreases the demand for normal goods.
• The direction of shifts and their effects can be tested and reasoned by decomposing multiple shifts into individual steps and observing cumulative effects on price and quantity.
• When solving multi-event questions, it helps to tag potential causes as affecting demand (D) or supply (S), and then examine how those forces alter the equilibrium.

Shifters by type

• Demand shifters (five commonly cited):
  • Income: normal goods ↗ with income, inferior goods ↘ with income (the transcript notes that demand moves opposite for inferior goods).
  • Prices of related goods: substitutes and complements influence demand.
  • Tastes and preferences.
  • Expectations about future prices or income.
  • Number of buyers (market size).
  • Note: The transcript mentions five demand shifters and explicitly discusses income; it also briefly mentions “number of sellers” in a way that seems to mix supply and demand, which is typically a supply shifter. Treat that as a potential misstatement in the lecture, and rely on the standard five demand shifters listed above.
• Supply shifters (five commonly cited):
  • Input prices (cost of production).
  • Technology (productivity improvements lower costs and shift supply right).
  • Prices of related goods produced (if you produce multiple goods, relative profitability shifts supply).
  • Expectations about future prices (if producers expect higher prices later, they may restrict current supply).
  • Number of sellers in the market.

How to think about shifts and directions

• Increase in demand (shift right) typically leads to higher price and higher quantity, all else equal.
• Decrease in demand (shift left) typically leads to lower price and lower quantity, all else equal.
• Increase in supply (shift right) typically leads to lower price and higher quantity, all else equal.
• Decrease in supply (shift left) typically leads to higher price and lower quantity, all else equal.
• If both demand and supply shift, the price change depends on which shift dominates; the quantity outcome depends on the relative magnitudes as well.

Step-by-step problem-solving approach (as illustrated in the transcript)

1) Identify which curves shift (demand, supply, or both) and list the shifters involved.
2) Determine the direction of each shift (left/down or right/up).
3) Conceptually sketch the new equilibrium: compare the new intersection to the original E1. If only one curve shifts, the new equilibrium is straightforward. If both shift, consider possible pairings (e.g., D shifts left and S shifts right).
4) If the problem does not specify which shift is bigger, acknowledge that you cannot determine the exact new price and quantity; instead, state the qualitative result (e.g., price must fall) and indicate uncertainty about quantity.
5) Check your work by decomposing the shifts into individual steps: combine shifts to see if the net effect reproduces the same final qualitative results.
6) Use a simple cross-check with a hypothetical ordering of shifts (e.g., two demand shifts, two supply shifts) to confirm the final direction of price and quantity.

Examples and notes from the transcript

• Example: Both supply and demand shift in a scenario where demand shifts left and supply shifts right.

  • Observation: Price falls for sure, but the quantity could go up or down depending on the magnitudes; thus quantity has a question mark.
  • Reasoning: If you decompose the shifts (e.g., multiple small shifts) you might end up with a net decrease in demand and an increase in supply, which leads to lower price and higher quantity, illustrating how the final quantity is indeterminate without magnitude information.

• Issue about steps with jelly and jelly-related problems:

  • The speaker asks: What event would raise the equilibrium price of jelly and lower the equilibrium quantity? This implies a shift that raises price while reducing quantity (one curve shifts in a way that moves to a higher price but to a lower quantity).
  • The speaker uses a method to identify which curve shifts first (step 1) and which one shifts second (step 2), and then checks whether the change is due to demand or supply:
  • If a factor affects demand, label it with a D and consider the direction (right for increase, left for decrease).
  • If a factor affects supply, label it with an S and consider the direction (right for increase, left for decrease).
  • Example adjustments mentioned: price of marshmallow fluff (a substitute for jelly) would affect demand (D). The price of grapes as an input would affect supply (S). Consumers’ income affects demand (D).
  • Conclusion (as given): In many two-event problems, you end up with two demand shifts or two supply shifts, and you analyze from there.

• Problem nine (gasoline context):

  • An extreme abundance of a resource lowers its price, which lowers input prices and raises supply. Result: supply shifts right and price falls for gasoline.
  • If incomes fall (recession), that affects demand: inferior goods example. A fall in income increases demand for inferior goods (e.g., store brands), while a rise in income increases demand for normal goods.
  • In the described scenario: with a fall in income and a supply shift that lowers price, the analysis foretells a new equilibrium with a lower price and, depending on the magnitudes, the quantity could move in either direction.
  • The notes emphasize: inferiors vs normals matter for demand; price and quantity changes must be inferred from the dominant shift.

• Inferior goods discussion (incomes and demand):

  • Inferior goods: demand rises when income falls; demand falls when income rises.
  • Normal goods: demand rises when income rises; demand falls when income falls.
  • The transcript uses this to reason about how changes in income affect demand and the resulting equilibrium.

• Quick synthesis from the transcript regarding equilibrium changes (summary):

  • If demand shifts, you can often predict the direction of price and quantity.
  • If supply shifts, you can often predict the direction of price and quantity.
  • If both shift, you need the relative magnitudes to know the exact outcome for quantity; price tends to move in a direction determined by the net effect on the relative strength of shifts (in the example, price tends to fall when demand shifts left and supply shifts right).

Notation and formulas to remember (LaTeX)

• Equilibrium condition (conceptual):
  Qd(P) = Qs(P)
  The equilibrium price and quantity are those that satisfy the equality of quantity demanded and quantity supplied.
• Demand and supply as functions of determinants: Qd = f(P, I, P{sub}, P{comp}, T, E, N) Qs = g(P, w, T, Ns, Es) where
  • P is price, I is income, Psub is the price of substitutes, Pcomp is the price of complements, T is tastes/preference, E is expectations, N is number of buyers, w is input prices, Ns is number of sellers, T is technology, Es is supply expectations.
• Directional shifts (informal shorthand):
  • Demand shift right: D → D′, typically implies P↑ and Q↑ (ceteris paribus)
  • Demand shift left: D → D′′, typically implies P↓ and Q↓ (ceteris paribus)
  • Supply shift right: S → S′, typically implies P↓ and Q↑ (ceteris paribus)
  • Supply shift left: S → S′′, typically implies P↑ and Q↓ (ceteris paribus)
• Note: When multiple shifts occur, the net effect on Q and P depends on the relative magnitudes of the shifts. If the transcript’s example shows a leftward demand shift and a rightward supply shift, the price falls for sure, while the quantity is indeterminate without more information.

Quick reference checklist for solving problems

• Identify whether the determinant affects demand (label D) or supply (label S).
• Determine the direction of the shift (left/down vs right/up).
• Predict the implied movement of price and quantity for each single shift.
• If both curves shift, assess whether the price can be determined qualitatively (often yes for price if one shift dominates) and acknowledge quantity may be ambiguous without magnitudes.
• Consider decomposing complex shifts into simpler, sequential steps to verify the final outcome.
• When given an example with substitutes/complements or income changes, apply the D or S labeling to see how the equilibrium will move.

Note: The transcript contains a few informal or potentially mixed references (e.g., mentioning "number of sellers" as a demand shifter). The standard economics framework treats number of buyers as a demand shifter and number of sellers as a supply shifter. Use the conventional assignment when solving problems, and note any ambiguities in the original notes.