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
Law of Demand
Causes of Shifts in Demand
Law of Supply
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
Income Effect: Higher prices make consumers feel poorer, reducing purchases.
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:
Explain relationships between price, quantity demanded, and quantity supplied.
Illustrate these relationships through demand and supply curves.
Recognize factors beyond price that can affect these curves.