Supply and demand lecture notes

Chapter 1: Introduction to Demand and Supply

• Overview of Market Dynamics

  • Two primary players in the market:

    • Consumers: Exercise demand.

    • Producers (Suppliers): Exercise supply.

• Demand Curve:

  • Negative or inverse relationship between price and quantity demanded.

  • As price increases: Quantity demanded decreases.

  • As price decreases: Quantity demanded increases.

  • Important distinction between:

    • Quantity Demanded: Specific quantity at a particular price.

    • Demand: All combinations of prices and associated quantities demanded.

• Shifts in Demand Curve:

  • Increase in Demand: Curve shifts right, occurs due to:

    • Changes in consumer tastes (fashion trends).

    • More buyers entering the market.

  • Decrease in Demand: Curve shifts left, happens when:

    • Fewer consumers in the market.

• Impact of Consumer Income:

  • Normal Goods: Demand increases with rising income.

  • Inferior Goods: Demand decreases as income rises (e.g., secondhand clothing).

• Point of Discussion:

  • Comedy regarding children considered inferior products from an economic perspective.

Chapter 2: Price of Margarine and Related Goods

• Relationship of Products:

  • Products can be Substitutes, Complements, or Unrelated.

    • Substitutes: Exchangeable products (e.g., butter and margarine).

    • Complements: Used together (e.g., bread and butter).

• Margarine’s Price Change Impact:

  • If price of margarine increases: Demand for butter increases (shifts right).

  • If the price of margarine decreases: Demand for butter decreases (shifts left).

• Bread and Margarine Relation:

  • Proving complementary relationship; price of margarine rises = Demand for bread decreases (shifts left).

• Understanding Relationships:

  • Don’t memorize impact; understand how price changes influence related goods.

Chapter 3: Consumer Expectations and Market Dynamics

• Consumer Expectation Impact on Demand:

  • If consumers expect future prices (e.g., TV prices) to drop, current demand decreases.

  • Example: Anticipating lower future prices leads to reduced current purchasing.

• Market Reactions to Price Changes:

  • Anticipation of a tax increase (e.g. VAT) can increase current demand before the change.

Chapter 4: Specific Factors Influencing Demand

• Specific Situational Factors:

  • Example: Demand for umbrellas may increase due to rain.

• Important Distinction:

  • Increased price affects quantity demanded, not demand itself.

• Introduction to Supply Side:

  • Next focus will shift to suppliers, understanding their role independent of demand dynamics.

Chapter 5: Understanding Supply Curves

• Supply Definition:

  • Positive relationship between price and quantity supplied; higher prices incentivize greater production.

• Practical Example – Apple Farming:

  • Increasing production based on price shifts, yet subject to growth time constraints.

• Horizontal Summation:

  • Total supply in the market is derived from the horizontal addition of individual supply curves.

Chapter 6: Factors Affecting Supply

• Resource Prices:

  • Lower input costs (e.g., leather) increase supply (shifts right).

  • Higher input costs (e.g., wages) decrease supply (shifts left).

• Technological Advances:

  • Innovations can lead to an increase in supply as more products can be produced efficiently.

Chapter 7: Conclusion and Application

• Summary of Shifts:

  • Rightward shifts indicate increases in supply, while leftward shifts indicate decreases.

• Overall Understanding:

  • Both supply and demand curves are influenced similarly by market conditions, resource changes, and consumer behavior.