Supply and Demand

I. Demand

  • Equilibrium: Point where no one can improve their situation by changing behavior.

    • Similar to Marginal Cost = Marginal Benefit.

  • Demand Curve: Represents marginal benefits across a whole market (e.g., socks, chicken).

    • Law of Demand:

      • As price increases → quantity demanded decreases.

      • As price decreases → quantity demanded increases.

II. Supply

  • Supply Curve: Represents marginal costs across a whole market.

    • Law of Supply:

      • As price increases → quantity supplied increases.

      • As price decreases → quantity supplied decreases.

III. Equilibrium

  • Supply & Demand Curves combined: Key economic insight.

    • Equilibrium occurs where Marginal Cost = Marginal Benefit.

      • P*: Equilibrium price.

      • Q*: Equilibrium quantity.

    • Market Price: Price no one can deviate from or influence.

IV. Shifting a Curve

  • Supply Curve = Marginal Costs; Demand Curve = Marginal Benefits.

  • Shifts occur when costs or benefits change:

    • Result: Movement along the other curve to a new equilibrium.

    • Ceteris Paribus: Assume “all other things being equal” to isolate changes.

  • Example: Hurricane destroys book factories → supply shifts left:

    • Fewer books produced at higher prices.

V. Common Demand Shifters

  1. Income

    • Normal Goods: Income ↑ → Demand ↑

    • Inferior Goods: Income ↑ → Demand ↓

  2. Population of Consumers

  3. Price of Substitutes: Goods used instead of one another.

  4. Price of Complements: Goods consumed together.

  5. Tastes

VI. Common Supply Shifters

  1. Production (e.g., productivity changes).

  2. Input Prices

  3. Population of Producers

  4. Opportunity Cost

VII. Revisiting Curve Shifts

  • 4 Possible Outcomes:

    1. Price ↑, Quantity ↓ → Supply shifts left.

    2. Price ↑, Quantity ↑ → Demand shifts right.

    3. Price ↓, Quantity ↓ → Demand shifts left.

    4. Price ↓, Quantity ↑ → Supply shifts right.

  • Strategy:

    • Supply = Marginal Cost; Demand = Marginal Benefit.

    • Ask: Does the change affect consumer preferences or production ease?