Supply and Demand Flashcards

Topic 1: Supply and Demand

Introduction

• Understanding supply and demand is crucial for analyzing market mechanisms in economics.

• Interactions between buyers and sellers allocate resources efficiently.

• Key concepts to explore:

  • Information Transmission in markets.

  • Price Incentives: how prices motivate economic behavior.

  • Determination of Production and Consumption: identifying who produces and consumes goods.

Aims of the Lecture

Overall Understanding

• Objective: Grasp how supply and demand influence market prices and behaviors.

• Today’s focus: determinants of supply and demand.

• Future discussions to include:

  • How supply and demand dictate pricing.

  • The role of businesses and government in pricing.

The Demand and Supply Forces

Definitions

• Demand: Quantity consumers are willing and able to buy at a specific price.

• Supply: Quantity sellers are willing and able to produce at a given price.

Example Case Study

• Impact of the coronavirus on prices:

  • Price of a unit surged from £0.086 to £1.12 in a 10-day span.

  • Demonstrates rapid change in demand and supply under crisis conditions.

Lecture Outline

1. Law of Demand

2. Causes of Shifts in Demand

3. Law of Supply

4. Causes of Shifts in Supply

Reading Materials

• Key texts to supplement understanding:

  • Lipsey and Chrystal and Sloman, Wride and Garratt (various editions).

  • Articles on current market issues (e.g. fuel pricing and shortages).

Assumptions in Buyer and Seller Behavior

Buyer Behavior

• Buyers: Individual consumers seek to maximize utility.

  • Utility = overall satisfaction from consumption.

• Purchasing Decision: Consumers buy products if the price is below their maximum willingness to pay.

Seller Behavior

• Sellers: Firms aim for profit maximization without impacting market price (price takers).

The Nature of Demand

Quantity Demanded

• The quantity consumers wish to purchase does not always equal the amount actually bought.

• The law of demand states:

  • Quantity demanded decreases as price increases.

Economic Effects

1. Income Effect: Higher prices make consumers feel poorer, reducing purchases.

2. Substitution Effect: Consumers opt for cheaper alternatives, affecting overall demand.

The Demand Curve

Interpretation

• Demonstrates the relationship between price and quantity demanded.

• Law of Demand: Quantity demanded rises when prices fall.

• Ceteris Paribus: other factors remain constant during analysis.

Shifts in Demand

Causes of Demand Shifts

• Income: Increases lead to greater demand for normal goods.

• Related Goods: Change in prices of substitutes can shift demand right; complements shift demand left.

• Tastes and Preferences: Shift when consumers favor a product due to trends or advertising.

• Number of Buyers: Demand increases with more consumers.

• Future Expectations: Anticipated changes in income or prices can shift demand.

The Nature of Supply

Quantity Supplied

• Quantity supplied is the amount firms can and want to offer at a specific price.

• Law of Supply: Quantity supplied increases with rising prices.

The Supply Curve

Interpretation

• Represents the relationship between price and quantity supplied.

• Changes in price lead to movements along the curve, not shifts.

Shifts in Supply

Causes of Supply Shifts

• Input Prices: Rising costs can shift supply left (decrease supply).

• Technology: Advancements can shift supply right (increase supply).

• Random Shocks: Unexpected changes can adversely affect supply.

• Number of Sellers: More sellers lead to increased supply.

Summary

• Law of Demand: Inverse relationship between quantity demanded and price.

• Demand Curve: Quantifies demand at various prices under constant conditions.

• Law of Supply: Direct relationship between quantity supplied and price.

• Understanding demand and supply curves creates a basis for analyzing market changes.

Learning Outcomes

By the end of the lecture, students should be able to:

1. Explain relationships between price, quantity demanded, and quantity supplied.

2. Illustrate these relationships through demand and supply curves.

3. Recognize factors beyond price that can affect these curves.