Demand and Supply

Last updated Sep 12, 2023 Edit Source

• The quantity of a good or service that consumers are willing and able to buy at each price in a particular point in time.

• Inverse relationship between the price of a product and the quantity of the product demanded due to:
• Substitution effect - When a product becomes more expensive, consumers substitute to a cheaper good.
• Income effect - When a product becomes more expensive, it takes up a larger portion of income and then spends less.

A market demand curve is obtained from the horizontal summation of individual demand curves.

• A movement along the existing demand curve
• Due to changes in price
• Expansion - decrease in price
• Contraction - increase in price

• The quantity demanded of the changes at every price
• Due to change in non-price factors
• Rightward shift - increase in demand
• Leftward shift - decrease in demand

• Tastes and preferences
• Price of related goods
• Substitutes
• Complements
• Level of disposable income
• Normal goods - as income increases, demand increases
• Inferior - as income increases, demand decrease
• Demographic factors
  • Age, gender, socioeconomic status
• Expectations of consumers
  • Consumers may decrease consumption if they are expecting prices to fall

Factors that would increase demand:

• Price of movie tickets increase, increase demand for streaming services - substitute

Factors that would decrease demand:

• Increase in the price of phones, decrease in demand for phone cases - complement goods

• Supply is the amount of goods or services that producers are willing and able to sell at each price point at a particular point in time

There is a positive relationship between the price of a good and the quantity supplied of that good. At higher prices, suppliers are willing to produce more as it means that they can earn more profit.

• The curve obtained from the horizontal summation of individual supply curves

A movement along the existing supply curve

• Due to changes in the price of the good
• Expansion in Supply: Increase in price
• Contraction of Supply: Decrease in price

The quantity supplied of the good changes at every price

• Due to a change in non-price factors
• Rightward shift: Increase in supply
• Leftward shift: Decrease in supply

• Expected price changes cause suppliers to alter current supply to take advantage of future prices

• Improvement in technology can reduce production cost, allowing suppliers to produce more at a lower cost
• Increase in supply is shown as a rightward shift of the supply curve

• If the price of a related good increases, the supplier can shift production to increase the quantity supplied of the related good

• If input prices go down, supply can increase
• If input prices go up, supply decreases

• Government regulations influence the number of suppliers in the market, which increases or decreases market supply
• Government regulations can take the form of taxes, tariffs, subsidies and quotas

The state of the market where there is no tendency for either demand or supply to change

Equilibrium price is the price that clears the market, where the quantity demanded equals the quantity supplied.

• The process by which the forces of demand and supply interact to determine the price of a good or service

Aka Price Mechanism

• When the quantity demanded exceeds the quantity supplied.
• Consumers bid among themselves for the limited goods so the price of the good increase.
• **$Q_d > Q_s$

• When the quantity supplied exceeds the quantity demanded
• Firms lower their prices to clear their excess stock
• $Q_s > Q_d$

1. Non-price factors
2. Increase/decrease - Shift
3. @ original price - Compare $Q_d$ and $Q_s$ of new curve
4. Identify temporary surplus/shortage
5. Action taken to clear price
6. Expansion/Contraction
7. New equilibrium - Compare

There is an increase in price of complementary goods causing a decrease in demand, shifting the demand curve to the left from D to D1. At the original price point, Quantity supplied, $Q_e$, exceeds Quantity demanded, $Q_2$. There is a temporary surplus from $Q_e$ to $Q_2$. Firms decrease the price to get rid of excess stock leading to a contraction along the supply curve, causing an expansion along the D curve. The temporary surplus is cleared and the new equilibrium point is at a lower price point, P3 and at a higher quantity, $Q_3$.

There is a non-price factor that is causing an increase in demand, shifting the demand curve to the right from $D$ to $D_1$ and a non-price factor causing a decrease in supply, shifting the supply curve to the left, from $S_1$ to $S_2$. At the original price point, quantity demanded, $Q_3$, exceeds quantity supplied, $Q_2$. There is a temporary shortage from $Q_2$ to $Q_3$. Consumers bid up the price leading to contraction along the demand curve, leading to an expansion along the supply curve. The temporary shortage is cleared and the new equilibrium point is at a higher price point, $P_2$, and at an indeterminate quantity, $Q_1$.

There is new technology causing an increase in supply shifting the supply curve to the right from $S_1$ to $S_2$ and there is a decrease in disposable income causing a decrease in demand shifting the demand curve to the right from $D_1$ to $D_2$. At the original price point, quantity supplied, $Q_3$, exceeds quantity supplied, $Q_2$. There is a temporary surplus from $Q_2$ to $Q_3$. Firms decrease the price to get rid of excess stock leading to a contraction along the supply curve, causing an expansion the $D$ curve. The temporary surplus is cleared and the new equilibrium point is at a lower price point, $P_2$ and at an indeterminate quantity, $Q_1$.