Economics Chapter 2: Demand and Supply

Chapter 2: Demand and Supply: An Introduction

• This chapter introduces the concepts of demand, supply, market, and equilibrium.
• Learning objectives include explaining the concept of demand, supply, the market, and equilibrium.
• Demonstrating the causes and effects of a change in demand and supply.
• Explaining why demand and supply determine price and quantity traded.

LO1: Demand

• Demand refers to the quantities consumers are willing and able to buy at different prices.
• Price is the most critical determinant.
• Demand involves both the desire and the ability of consumers to purchase.
• It assumes other things remain constant (ceteris paribus).
• Demand refers to a range of prices and measures quantities over time.

Demand Important Points

• Demand is a schedule showing the various quantities demanded per period at different prices.
• The demand curve is a graphic representation of the demand schedule.

Demand Schedule Example

• Table 2.1 shows an individual demand schedule for cases of a product at various prices.
• At a price of $17, the quantity demanded is 7 cases per month.
• At $18, the quantity demanded is 6 cases. And so on.

Demand Curve

• The demand curve is a graph showing the relationship between quantity demanded and price.
• It slopes downwards: as price increases, quantity demanded decreases (and vice-versa).

Why the Demand Curve Slopes Downward

• Income effect: A price change affects real income; lower prices mean higher real income, increasing the quantity demanded.
• Substitution effect: Consumers substitute cheaper goods for more expensive ones.

Market Demand

• Market demand is the combined demand of all consumers for a product or service.
• A market demand schedule shows the market demand at different prices; e.g. Table 2.2.
• Market demand is the horizontal summation of individual demand curves.

LO2: Supply

• Supply refers to the quantities producers are willing and able to supply at different prices.

Supply Schedule

• A table showing the various quantities supplied per period at different prices, such as table 2.3.

Supply Curve

• The supply curve graph shows the relationship between quantity supplied and price (slopes upwards).
• As price increases, quantity supplied increases (vice-versa).

Why the Supply Curve Slopes Upward

• Producers are motivated by profit. Higher prices mean greater profit, leading to more production.
• Costs increase as production increases, so higher prices are required to motivate increased supply.

Market Supply

• Market supply is the total supply from all producers of a product.
• It's the horizontal summation of each individual producer’s supply curve.

Assumptions

• All producers are making a similar product
• Consumers have no preference among producers

LO3: The Market

• A market is a mechanism allowing buyers and sellers to exchange goods/services.

LO4: Market Equilibrium

• The point where quantity demanded equals quantity supplied.
• There's neither a shortage nor surplus.

Surplus

• Occurs when quantity supplied exceeds quantity demanded (at a price above equilibrium).

Shortage

• Occurs when quantity demanded exceeds quantity supplied (at a price below equilibrium). Example: Table 2.5 and 2.6.

Market Adjustments

• A surplus results in lower prices and increased demand (eventually reaching equilibrium).
• A shortage results in higher prices and reduced demand (eventually reaching equilibrium).

LO5: Change in Demand

• A change in demand is when the quantity demanded at each price changes.
• This is due to a factor other than price, e.g. consumer preferences, income, or prices of related goods (substitutes and complements).
• Increase in demand means the demand curve shifts up/right.
• A decrease in demand means the demand curve shifts down/left.

Determinants of Demand

• Consumer preferences (tastes). If tastes change, demand changes.
• Consumer incomes.
• Prices of related products (substitutes and complements).
• Expectations of future prices, income, or availability.
• Population size or income/age distribution.

LO6: Change in Supply

• A change in supply occurs when the quantity supplied at each price changes, due to a factor besides price.
• Increase in supply: supply curve shifts right/downward.
• Decrease in supply: supply curve shifts left/upward.

Determinants of Supply

• Prices of productive resources. If resource prices rise, supply decreases.
• Government taxes and subsidies. Taxes reduce supply; subsidies increase supply.
• Technology. Improvements in tech increase supply.
• Prices of substitute products in production. An increase in price for a substitute product in production will decrease supply.
• Future expectation of suppliers. Lower expected future prices will lead to increased supply.
• Number of suppliers. More suppliers usually mean increased supply.

LO7: Final Words

• Demand and supply determine price and quantity (not the other way around).
• A change in demand causes a shortage or surplus and a change in price and quantity.
• A change in supply causes a shortage or surplus and a change in price and quantity.