Chapter 1-7 Notes: Supply and Demand Basics
Chapter 1: Introduction
Chapter 2: Working On Supply
Key actors:
Demand: the consumers who buy goods and services.
Supply: the producers who make goods and services.
On a graph, demand and supply interact to determine market outcomes.
Core idea: Demand represents what consumers are willing to buy at various prices; supply represents what producers are willing to produce at various prices.
Chapter 3: Say The Price
Equilibrium on a graph: the intersection point of the demand and supply curves.
Definition (equilibrium): the price at which quantity demanded equals quantity supplied.
Example given to illustrate equilibrium:
At price p = 5, quantity demanded QD = 100 and quantity supplied QS = 100. This is the equilibrium point in the example.
Distinction between two concepts:
Quantity demanded: the amount consumers want at a single price.
Demand: the entire demand curve, i.e., the amount consumers want at all possible prices.
If the price is at a different level, say p = 1:
On the demand curve, the quantity demanded would be greater than 100 (e.g., around 150).
On the supply curve, the quantity supplied would be less than 100 (e.g., around 50).
Summary: Equilibrium occurs where the demand and supply curves intersect; price and quantity at this point reflect balance between buyers and sellers.
Chapter 4: Charge A Price
If the price is below equilibrium, quantity demanded by consumers exceeds quantity supplied by businesses.
Consequence: Shortage arises. Shortage magnitude example: the difference between quantity demanded and quantity supplied at that price, which is given as ext{Shortage} = QD(p) - QS(p) = 100. (here the shortage is described as 100 units.)
Market response to shortage: there is pressure for the price to rise toward equilibrium.
Intuition for price movement: firms aim to maximize profits; prices rise when there is excess demand (shortage).
Connection to marginal cost: supply decisions are based on marginal cost; a price above marginal cost yields profit.
Key implication: When price rises toward the equilibrium, the shortage shrinks and eventually disappears as supply catches up with demand.
Chapter 5: Raise That Price
Visual/conceptual idea: Profit for producers is represented by a triangular area on the price-quantity diagram.
If producers can raise the price from the current level to a higher level (e.g., up to p = 5 in the example) and sell more or at a higher margin, they can increase profit (the triangle becomes larger).
Central goal for firms: maximize profits.
Constraint: A business cannot set any price it wants; demand imposes limitations.
Example given of price increase to p = 10:
On the demand side: after increasing price to 10, quantity demanded becomes Q_D = 50.
On the supply side: quantity supplied becomes Q_S = 150.
This illustrates a higher price that can generate larger potential profits but also creates a large gap between quantity supplied and quantity demanded.
Takeaway: Profit opportunities depend on the balance between price, quantity demanded, and quantity supplied, as well as the shape of the demand and supply curves.
Chapter 6: A Lower Price
Conversely, when the price is above equilibrium, quantity supplied exceeds quantity demanded.
Example at price p = 10:
Quantity demanded: Q_D = 50.
Quantity supplied: Q_S = 150.
Surplus magnitude: ext{Surplus} = QS - QD = 100.
Market response to surplus: there is pressure for the price to fall toward equilibrium.
Rationale for lowering price: firms incur storage costs (warehousing, inventory carrying costs). To avoid these costs and clear inventory, they reduce prices.
Key implication: As the price declines toward equilibrium, the surplus diminishes and is eliminated at equilibrium.
Chapter 7: Conclusion
Recap: If price is below equilibrium, you have a shortage.
The transcript ends with an incomplete line: "If price is in front of the clock…" which appears to be cut off; the intended idea seems to restate the shortage vs surplus relationship but is not fully provided in the transcript.
Takeaway from the chapter: Shortages occur when price is too low; surpluses occur when price is too high; markets tend to move toward equilibrium through price adjustments.
Key concepts and formulas
Demand vs. quantity demanded:
Quantity demanded: the amount consumers are willing to buy at a given price.
Demand: the entire demand curve across all prices.
Supply vs. quantity supplied:
Quantity supplied: the amount producers are willing to produce at a given price.
Supply: the entire supply curve across all prices.
Equilibrium (on a price-quantity graph):
Occurs where QD(p^) = QS(p^) at price p^ and quantity Q^.
Example in the transcript: at p = 5, QD(5) = 100 and QS(5) = 100.
Shortage at price below equilibrium:
Shortage magnitude: ext{Shortage} = QD(p) - QS(p), e.g., 100 in the example.
Surplus at price above equilibrium:
Surplus magnitude: ext{Surplus} = QS(p) - QD(p), e.g., 100 in the example.
Incentives and market dynamics:
Shortages exert upward pressure on price toward equilibrium.
Surpluses exert downward pressure on price toward equilibrium.
Storage costs motivate firms to lower prices to clear excess supply.
Profit visualization (conceptual):
Profit is depicted as a triangular area on the price-quantity diagram; changing the price affects the size of this triangle.
In a simple intuition with linear relationships, profit considerations relate to the difference between price and marginal cost (and its interaction with the quantity sold).
Marginal cost and the supply decision:
Supply decisions are based on marginal cost; a firm is profitable when price exceeds marginal cost.
Numerical examples recap:
Equilibrium example: p^* = 5, Q^* = 100.
Shortage example at p = 1: QD = 150, bsp; QS = 50,
bsp; ext{shortage} = 100.Surplus example at p = 10: QD = 50, bsp; QS = 150,
bsp; ext{surplus} = 100.