Microeconomics_demand,supply and market equilibrium

Learning Objectives

  • Describe the nature of the demand and supply curve.

  • Explain the relationships between market demand and market supply and how it clears the market.

  • Determine the equilibrium price and quantity for a product and understand how the market mechanism works.

Introduction

  • Demand and supply analysis is fundamental to understanding economics.

  • Assesses the effects of changing economic conditions on market prices.

  • Investigates the implications of public policies like minimum wages, price supports, subsidies, and tariffs on production and market behavior.

Demand Curve

  • Definition: A visual representation showing the connection between the price of a good and the quantity demanded.

  • Characteristics:

    • Slopes downward, indicating that consumers typically purchase more at lower prices.

    • Mathematically represented as: QD = f(P) (Quantity Demand as a function of Price).

  • Normal Goods: The usual negative correlation between price and quantity demanded applies; exceptions include Giffen and inferior goods.

Factors Affecting Demand

  • Income: An increase in income raises purchasing power and, consequently, demand.

  • Prices of Related Goods:

    • Substitutes: If the price of substitutes rises, the demand for the given commodity increases.

    • Complements: If the price of complements rises, the demand for the commodity decreases.

  • Tastes and Preferences: Variations in consumer preferences can shift the demand curve.

Individual Demand Curve

  • Definition: Illustrates the quantity consumed by an individual over time at different price points.

  • Example: The demand function for commodity X can be expressed as: Qdx = 8 - Px, showcasing an inverse correlation with price.

Shifting of Individual Demand Curve

  • Changes in any factors other than price (like income or preferences) lead to a shift in the entire demand curve.

    • Normal Goods: A rise in income results in increased demand (shifts right).

    • Inferior Goods: An increase in income leads to decreased demand (shifts left).

Market Demand Curve

  • Represents the total quantity demanded by all consumers across various prices.

  • Achieved through the horizontal summation of individual demand curves.

Supply Curve

  • Definition: Represents the quantity of a good that suppliers are willing to sell at different price levels.

  • Characteristics:

    • Slopes upward, indicating that suppliers offer more quantity at higher prices; mathematically articulated as: QS = f(P).

    • Higher prices incentivize more firms to produce, thus increasing overall supply.

Individual Supply Curve

  • Determined by individual factors including the good's price and production costs.

  • Example: A solo supplier may have a supply function described as: QSx = –40 + 20Px.

Shifting of Supply Curve

  • Changes to factors outside of price cause the supply curve to shift.

  • Examples:

    • Innovations in technology may shift the supply curve to the right, signifying an increase in supply.

    • Variations in input costs can similarly cause shifts.

Market Supply Curve

  • Indicates the total quantity supplied by all suppliers at various price levels, determined through horizontal summation of individual supply curves.

Market Equilibrium

  • Definition: Occurs when quantity demanded is equal to quantity supplied; graphically represented by the intersection of demand and supply curves.

  • Equilibrium Price (P0): The price at which the market achieves balance.

  • Stability of Equilibrium: Can either be stable (returning to equilibrium) or unstable (moving further away from equilibrium).

Changes in Market Equilibrium

  • Shift in Demand Curve: An increase in demand (rightward shift) due to rising income results in higher prices and quantities.

  • Shift in Supply Curve: A rightward shift due to reduced production costs decreases price and boosts quantity.

  • Simultaneous Shifts: Such changes may alter both equilibrium price and quantity depending on the shifts' direction and magnitude.