Demand, Supply, and Market Equilibrium

Chapter 3: Demand, Supply, and Market Equilibrium

• Explores markets, demand, supply, market equilibrium, shifts in these factors, and government price controls.

Markets

• Markets involve interactions between buyers and sellers, and can be local, national, or international.
• Prices are determined through these interactions.

Demand

• Demand refers to a schedule/curve showing the quantity of a product consumers are willing and able to purchase at various prices over a specific time.
• Factors like "other things equal" must be assumed.
• Demand can be analyzed at an individual or market level.
• The Law of Demand states there is an inverse relationship between price and quantity demanded, meaning as price decreases, quantity demanded increases, and vice versa, all other factors being equal.
• Price acts as an obstacle for buyers.
• Diminishing marginal utility, income, and substitution effects explain the law of demand.

The Demand Curve

• Illustrates data for individual gasoline demand, showing that at $5, quantity demanded is 10, and at $1, it rises to 80.
• Market demand for an item like gasoline is the total demand from all buyers at each price point.
• At $5 per gallon, total demand is 30, while at $1, it's 221.

Shifts in Demand

• Demand can shift due to various factors.
• Factors include changes in consumer tastes, the number of buyers, and income levels (affecting normal and inferior goods).

Determinants of Demand

• Changes in the prices of substitute and complementary goods also cause shifts.
• Consumer expectations about future prices and income impacts current demand.
• Examples of these determinants include increased popularity in fitness boosting jogging shoe demand, or a drop in birth rates reducing the demand for toys.
• Rising incomes increase the demand for normal goods while reducing the demand for inferior goods.
• Reduced airfares reduce the demand for train travel while decreases in printer costs increases the demand for ink cartridges.
• Inclement weather in South America increases the demand for coffee beans.

Supply

• Supply represents a schedule/curve showing the quantity producers are willing and able to sell at various prices during a specific period.
• A supply schedule is a table, a supply curve is a graph.
• The amount that producers are willing to sell at a given price.
• Individual supply is different from market supply.
• The Law of Supply states that as the price increases, the quantity supplied increases, and vice versa, all other things being equal.
• Rising prices incentivizes producers.
• Production costs will eventually rise.

The Supply Curve

• At $5, quantity supplied is 60, while at $1, it is 5.
• Market supply of gasoline from 200 producers indicates that at $5, the quantity supplied is 12,000, decreasing to 1,000 at $1.

Determinants of Supply

• Supply is influenced by resource prices, technology, taxes and subsidies, prices of other goods, producer expectations, and the number of sellers.
• Decreases in microchip prices increase supply of computers, while increases in crude oil prices reduce supply of gasoline.
• Lower-cost space-launch technology increases the supply of satellite broadband.
• Improvements in AI increases the supply of customer-service chatbots.
• Increased excise taxes on cigarettes reduce supply, and declining state university subsidies also reduces supply.

Determinants of Factors that Shift the Supply Curve

• Rising cucumber prices reduce watermelon supply, and rising prices of alcohol-based hand sanitizers decreases gin supply.
• Expectations of rising lumber prices decrease the supply of logs today.
• Beliefs that gas prices will fall in the future will increase the supply of oil this year.
• More tattoo parlors increases tattoo supply.
• Formation of woman’s basketball leagues increases supply of woman’s sporting event.

Market Equilibrium

• Market equilibrium occurs at the intersection of demand and supply curves.
• The intersection determines the equilibrium price and quantity.
• Surpluses and shortages arise when prices deviate from equilibrium.
• Prices have a rationing function, and contribute to efficient allocation of resources.

Efficient allocation

• Productive efficiency involves producing goods at the lowest cost, using the best technology and mix of resources.
• Allocative efficiency involves producing the right mix of goods that are most valued by society.

Equilibrium Price and Quantity Data

• Shows a balance of supply and quantity
• At $5, quantity demanded is 2,000 and quantity is supplied is 12,000, where total supply balances quantity (7,000)
• Rationing balances selling and buying.

Shifts in Supply and Demand

• Increasing demand leads to higher prices and quantities.
• Decreasing demand leads to lower prices and quantities.
• Increasing supply leads to lower prices and higher quantities.
• Decreasing supply leads to higher prices and lower quantities.

Complex Cases

• Summarizes the effects changes of shifts in supply and demand have on prices and quantity

Global Perspectives on White Bread

• The average price of white bread varies across countries due to supply and demand, as well as government intervention.

Government Set Prices

• Price ceilings are set below the equilibrium to help consumers, but can lead to rationing problems and black markets; rent control is an example.
• Price floors are set above the market price to aid producers, but often generates surpluses; minimum wage is an example of this.

Pandemic Related Prices

• The pandemic initially caused empty store shelves with shortages because demand exceeded supply.
• Pandemic economics also caused a stock market crash, a spike in used car prices, increased demand for housing, and widespread labor shortages.