Supply and Demand Notes

Supply & Demand

Microeconomics

Relationship Between Price and Quantity Supplied

There is a direct, or positive, relationship between the price (P) of a good or service and the quantity supplied (Qs) of that good or service.
- $P \uparrow$ , $Qs \uparrow$
- $P \downarrow$ , $Qs \downarrow$

Relationship Between Price and Quantity Demanded

There is an inverse, or negative, relationship between the price of a good or service, and the quantity demanded (Qd) of that good or service.
- $P \uparrow$ , $Qd \downarrow$
- $P \downarrow$ , $Qd \uparrow$

Chocolate Bar Example

Supply

At P = $2.00, $Qs = 500$
At P = $1.60, $Qs = 400$

Demand

At P = $2.00, $Qd = 100$
At P = $1.60, $Qd = 200$

Shifting the Supply Curve

The supply curve can shift left or right based on various factors.

Shifting the Demand Curve

The demand curve can shift left or right based on various factors.

Determinants of Supply

Price = P
$Qs$ = Quantity supplied
$\Delta$ = Change
Number of sellers $\Delta$
Input prices $\Delta$
Technology $\Delta$
Producer expectations $\Delta$
Cost for factors of production
- Price of cocoa and sugar $\Delta$ : Supply decreases and shifts left from S1 to S2 if input prices increase.

Determinants of Demand

Price = P
$Qd$ = Quantity demanded
$\Delta$ = Change
Number of buyers $\Delta$
Income $\Delta$
Consumer expectations $\Delta$
Prices of related goods $\Delta$
- Price of complementary goods $\Delta$ (e.g., Graham crackers and marshmallows):
  Demand increases and shifts right from D1 to D2 if the price of complements decreases.

Law of Supply

As price increases, quantity supplied increases.

Law of Demand

As price increases, quantity demanded decreases.

Market Equilibrium

When a market is in equilibrium, the quantity demanded equals the quantity supplied at the price that clears the market.
This is the equilibrium price (Ep).
Eq = Equilibrium quantity
Quantity demanded (Qd) = Chocolate Bar Demand
Quantity Supplied (Qs) = Chocolate Bar Supply