Demand and Supply Overview

Demand and Supply Overview

• Market Prices: Prices fluctuate based on demand and supply dynamics.

• Competitive Market: High number of buyers/sellers; no single entity influences prices.

• Opportunity Cost: Relative price is the ratio of a good's price to its next best alternative, determining its opportunity cost.

Demand

• Demand Definition: Represents consumers’ wants, affordability, and purchasing plans at specific prices.
• Law of Demand: Higher prices lead to lower quantity demanded (substitution effect, income effect).
• Demand Curve: Graph showing relationship between price and quantity demanded; slopes downward.
• Demand Changes: Shift in demand curve due to factors other than price (income, preferences, related goods).

Key Factors Influencing Demand

• Related Goods: Substitutes (increase in price leads to an increase in demand of another good) and complements.
• Future Price Expectations: Anticipated price increases boost current demand.
• Income Changes: Higher income increases demand for normal goods; decreases for inferior goods.
• Population and Preferences: Larger populations increase demand; diverse preferences create differing demands.

Supply

• Supply Definition: Firm's willingness to produce/sell based on resources, technology, and profitability.
• Law of Supply: Higher prices encourage greater quantity supplied (supply curve slopes upward).
• Supply Changes: Influenced by production costs, technology advancements, supplier numbers, and government policies (taxes/subsidies).

Market Equilibrium

• Equilibrium Condition: Occurs when quantity demanded equals quantity supplied at a specific price.
• Price Adjustments: Surplus (excess supply) leads to price decreases; shortages (excess demand) lead to price increases.