Economics Chapter 3: Demand and Supply

Study Notes

A market is an arrangement that enables buyers and sellers to get information and do business with each other.
A competitive market has many buyers and sellers, so no single buyer or seller can influence the price.
The money price of a good is the amount of money needed to buy it.
The relative price of a good, or its opportunity cost, is the ratio of its money price to the money price of the next best alternative good.

Demand refers to the entire relationship between the price of a good and the quantity demanded.
The law of demand states that, other things remaining the same, the higher the price of a good, the smaller is the quantity demanded, and the lower the price of a good, the larger is the quantity demanded.
Two reasons for the law of demand:
- Substitution effect: When the relative price of a good or service rises, people seek substitutes, so the quantity demanded decreases.
- Income effect: When the price of a good or service rises relative to income, people cannot afford all the things they previously bought, so the quantity demanded decreases.

A demand curve shows the relationship between the quantity demanded of a good and its price when all other influences on consumers' planned purchases remain the same.
A rise in the price of a good, other things remaining the same, brings a decrease in the quantity demanded and a movement up along the demand curve.
A demand curve is also a willingness-and-ability-to-pay curve, where the smaller the quantity available, the higher is the price that someone is willing to pay for another unit.

When some influence on buying plans other than the price of the good changes, there is a change in demand for that good.
The six main factors that change demand are:
- Prices of related goods
- Expected future prices
- Income
- Expected future income and credit
- Population
- Preferences

Supply refers to the entire relationship between the quantity supplied and the price of a good.
The law of supply states that, other things remaining the same, the higher the price of a good, the greater is the quantity supplied, and the lower the price of a good, the smaller is the quantity supplied.
The law of supply results from the general tendency for the marginal cost of producing a good or service to increase as the quantity produced increases.

A supply curve shows the relationship between the quantity supplied of a good and its price when all other influences on producers' planned sales remain the same.
A rise in the price of a good, other things remaining the same, brings an increase in the quantity supplied.
A supply curve is also a minimum-supply-price curve, where the lowest price at which someone is willing to sell an additional unit rises as the quantity produced increases.

When some influence on selling plans other than the price of the good changes, there is a change in supply of that good.
The six main factors that change supply are:
- Prices of factors of production
- Prices of related goods produced
- Expected future prices
- The number of suppliers
- Technology
- State of nature

Equilibrium is a situation in which opposing forces balance each other.
Equilibrium in a market occurs when the price balances the plans of buyers and sellers.
The equilibrium price is the price at which the quantity demanded equals the quantity supplied.
Price regulates buying and selling plans, and price adjusts when plans don't match.

An increase in demand shifts the demand curve rightward, leading to a higher equilibrium price and a higher equilibrium quantity.
A decrease in demand shifts the demand curve leftward, leading to a lower equilibrium price and a lower equilibrium quantity.
An increase in supply shifts the supply curve rightward, leading to a lower equilibrium price and a higher equilibrium quantity.
A decrease in supply shifts the supply curve leftward, leading to a higher equilibrium price and a lower equilibrium quantity.
Changes in both demand and supply can lead to uncertain changes in equilibrium price and quantity.