Supply and Demand Model

The Supply and Demand Model

• This model describes how a competitive market operates where many buyers and sellers trade the same product
• No single buyer or seller can influence the market price
• Supply and demand model comprises five elements explaining market dynamics

Demand

• Demand refers to the quantity of a good or service consumers are willing to purchase at different prices

The Demand Curve

• The demand curve is a graph representing the demand schedule and illustrates the quantity of a good or service consumers are willing to buy at various prices
• The demand curve slopes downwards, reflecting the inverse relationship between price and quantity demanded
• "Other things equal" implies that factors shifting demand remain constant, with preferences held as given
• A fall in price causes movement down the demand curve

Factors Influencing Demand Shifts

• Demand shifts occur due to changes in quantity demanded at a given price, influenced by other factors
• This differs from movements along the demand curve caused by changes in the good's own price

Principal Factors Causing Demand Curve Shifts

• Changes in prices of related goods can either increase or decrease demand for the original product
• Substitute goods: increased price for one increases demand for the other, shifting demand to the right
• Complementary goods: increased price for one decreases demand for the other, as their demands are linked
• Changes in income affect demand for normal goods as increased income leads to increased demand
• For inferior goods, increased income results in decreased demand
• Changes in shifts in consumer attitudes and seasonal changes or trends which affects the demand for a good over time
• Changes in expectations about future prices or income can shift current demand
• An increase in the number of consumers leads to increased market demand due to population growth

Individual vs Market Demand Curve

• Individual: the connection between quantity demanded and price for one consumer
• Market: represents total quantity demanded by all consumers based on market price, derived from the horizontal sum of individual demand curves

Supply

• Supply defines how much of a good or service producers are willing to offer at various prices
• There is a direct relationship between price and supply

Supply Curve

• The supply curve portrays the supply schedule graphically and shows the quantities supplied at different prices
• It slopes upwards, showing a higher price leads to increased quantity supplied by producers

Factors Causing Supply Shifts

• A shift in the supply curve happens when the quantity supplied changes at any given price, influenced by other factors
• This shift is different from a movement along the curve which is caused by the good's own price

Main Factors Causing Supply Curve to Shift

• Changes in input prices: rising input costs raise production costs, decreasing supply, with the opposite effect for falling prices
• Changes in prices of related goods or services can be substitutes or complements in production and if the price of heating oil rises, an oil refiner might supply less gasoline
• Changes in technology: advances in technology reduce production costs, increasing supply
• Changes in expectations where expectations about future prices impact current supply decisions
• Changes in the number of producers: the number of producers directly impacts market supply

Individual vs Market Supply Curve

• Individual: the relationship between quantity supplied and price for an individual producer
• Market: the combined total production from all suppliers

Market Equilibrium

• Market equilibrium arises when demanded quantity equals supplied at a specific price
• Equilibrium price ensures all willing buyers find sellers and is also called the market-clearing price
• Equilibrium quantity: the amount bought and sold at equilibrium
• Graphically, equilibrium is the intersection of supply and demand curves
• Market prices move towards equilibrium in markets with tendency to have a single price

Surpluses and Shortages

• A surplus arises when prices exceed equilibrium, leading to excess supply
• This places downwards pressure on prices as sellers lower them to reduce excess inventory
• A shortage happens when prices are below equilibrium, leading to demand outstripping supply
• This creates upward pressure on prices as buyers compete for limited supply
• Changing factors in supply or demand shift curves resulting in new price and quantities

Impact of Shifts on Supply and Demand

• An increase in demand leads to both the equilibrium price and quantity rising
• A decrease in demand causes a decrease in the price and quantity at equilibrium
• Supply increasing results in a reduced price when in equilibrium, with raised quantity for equilibrium
• Decreased shifts to the left, raising the price when equilibrium is reached, decreasing demand
• When supply & demand curves happen at once, magnitude & direction can be changed to reach equal price and demand

Economic Efficiency

• Competitive markets allow decisions based on less complicated analyses
• It's easier for economists to model competitive rather than noncompetitive markets in turn

Willingness to Pay

• The point where a buyer is indifferent between buying or not buying a good
• It is influenced by individual consumer preferences and tastes

Consumer Surplus

• Consumer surplus measures net gain from a purchase and is defined by willingness to pay less market price
• Total consumer surplus is derived from where the demand curve lies below price in a market

Affect of Price on Consumer Surplus

• A drop in prices will affect consumer surplus directly

Cost

• Lowest price needed to make the seller sell costs
• Monetary cost

Producer Surplus

• Producer surplus represents the net gain for a seller, determined by the price they receive less their cost
• Derived cost from producers
• Total producer surplus shown by the are above supply and below the price in marketplace

Affect of Price on Producer Surplus

• A growth in prices affect producer and consumer surplus

Total Surplus and Gains

• Total surplus combines consumer and producer surpluses, that is the benefit for consumer and producers from trade
• Markets allows for mutual economical transactions which improve markets

Market Equilibrium and Efficiency

• Competitive markets hit a state where demand and supply match, and so the distribution is optimized
• Total is maximized meaning efficiency is maintained
• Reducing total surplus is caused by changing reallocation and consumption

Three actions That Increase Total Surplus Which Lower It

• Trade to a lower valued person
• Reduce producer sales
• Reduce trades or quantities

Achieving Market Functionality

• Markets allocate based on willingness and indication of value
• Markets allocate sales from those who value it most from lowest cost
• Transactional sales for those who have a mutual benefit
• Transactions will be voided if potential consumer is valued to little

Contributing Factors to Successful Markets

• Market failure arises form trade prevention, or where side effects are unaccounted for
• Markets and economy are reliant on distribution of profits

Competitive Markets

• Buyers and sellers optimized in that specific market
• Maximize the entire concept

Government Considerations

• Price and quantity regulated
• Issues will happen if markets are ineffective

Price Maximums

• Shortages take place, or crises happen, due to an increase in prices
• NYC is a good case - Not wanting to offer apartments -Shortage occurs due to an inefficient allowance -Loss in quality and care -Inability to pay will lead to less incentive -Rent costs will have an affect

Loss vs Efficiency

• Loses will happen when the market reduces its trading

Price bottoms

• Help farmers to support a price gain and increase
• Wage increases can affect workers
• Government sometimes needs to find work -Not being able to find buyers -Too many ponds etc -Trade will have an affect

Restrictions

• Limited to what can be bought, exported, or used with resources
• A right will be supported by the government

Taxi and Market

• NYC has limit prices which creates inefficiency
• Prices rise which is manageable
• Not being able to sell the right to use a medallion
• There will be increase and issues with economics