Principles of Microeconomics: Supply and Demand

Study Notes

The text discusses the market forces of supply and demand.
Questions are posed to explore factors affecting buyers' and sellers' demand and supply for goods.
It examines how supply and demand interact to determine the price of a good and the quantity sold.
The impact of factors affecting demand or supply on market price and quantity is also analyzed.
The role of markets in allocating resources is highlighted.
A market is defined as a group of buyers and sellers of a particular product.
A competitive market features many buyers and sellers, each with a negligible effect on price.
Perfectly competitive markets are characterized by identical goods, numerous and small buyers and sellers, where each participant is a "price taker" meaning they can't influence the price.
This document assumes perfectly competitive markets.

The quantity demanded of a good is the amount buyers are willing and able to purchase.
The law of demand states that quantity demanded decreases when the price rises, other factors remaining constant.
A demand schedule presents the relationship between the price of a good and the quantity demanded.
Helen's demand for lattes is used as an example, demonstrating that preferences conform to the law of demand.
The demand schedule shows the relationship between price and quantity demanded.

Market demand is the sum of individual demands at each price.
An example using Helen and Ken, as the only two buyers, illustrates the concept.
The market demand curve visually represents market demand.

The demand curve displays how price influences quantity demanded, assuming other things remain constant.
There are factors beyond price that directly affect buyer demand. These are non-price determinants of demand.
Such factors, including the number of buyers, income levels, prices of related goods, tastes, and expectations, can shift the demand curve.
An increase in the number of buyers increases quantity demanded at each price, shifting the curve to the right.
A demand curve shift happens when a non-price determinant of demand changes, like an income change. Example: a normal good has positive income relation and inferior goods has a negative income relation.
Changes in tastes or expectations of consumers, or prices of related goods (substitutes/complements) also shift the demand curve.
A change in tastes affects consumer preferences towards the good, influencing the demand for that good.
Expectations, such as projected income increases, can also impact the demand for certain products.
The interaction of price of substitutes and complements impacts the demand for those goods.

The quantity supplied of a good is the amount sellers are willing and able to sell.
The law of supply states that quantity supplied increases with price, all else equal.
A supply schedule connects price and quantity supplied.
Starbucks' supply of lattes serves as an illustration, adhering to the law of supply.

The supply curve illustrates the relationship between price and quantity supplied, all other things being equal.
Non-price determinants of supply, such as input prices, technology, expected future prices, or the number of sellers, can affect the supply curve.
A change in input prices will shift the supply curve, similar impacts can be caused by changes in technology or the number of sellers.
Changes in expectations, reflecting sellers' anticipations of future prices, can influence the current supply curve, as can the entry or exit of firms affecting the supply curve position.

Surplus happens when quantity supplied exceeds quantity demanded.
A surplus causes sellers to decrease prices, thereby increasing quantity demanded and decreasing the surplus.
A shortage arises when quantity demanded exceeds quantity supplied.
When shortages arise, prices rise because more buyers are interested in the product than the supply that is available.
These price adjustments restore equilibrium in the market.

Establish whether the event shifts the supply curve, demand curve, or both.
Determine the direction of the shift.
Compare the new equilibrium to the original one to identify the impact on equilibrium price and quantity.