Supply and Demand
Introduction
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Goals and Objectives
- Identify what a market is.
- Identify the determinants of demand and supply for a good and service
- Forecast what happens to equilibrium price and quantity as a result of a change in the market conditions.
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“How are you doing?” vs “May I buy you a drink?”, the cost varies
Demand
- Factors affecting your quantity demanded → the value side of the market
- Price
- Price of related goods (complement, or substitute)
- Your income
- Your preference
- Demand schedule = price and quantity demanded table
- Demand curve = price vs quantity demanded demand graph
- Law of Demand = price increases, demand goes down, and vice versa.
- Comparative Analysis = determine the initial situation and analyze the change
Demand and Quantity Demanded
When the price goes up or down, we move along the demand curve, but the curve itself is NOT shifted! We say that the demand or the value does NOT change in this case, but the quantity demanded does.
- When price of complementary/substitute goods change, we have a change in Demand.
- The increase in income may increase the demand. However, the demand for inferior good may go down.
Supply
- Determinants of quantity of supply → the cost side of the market
- Price
- Price of inputs
- Technology used
- Supply Schedule and Supply Curve - Price over quantity supplied graph
- Price goes up, the quantity supplied goes up. Note that the supply does not change.
Equilibrium
- supply > demand = supply surplus, price goes down
- supply < demand = supply shortage, price goes up
- The price may never reach the equilibrium point, but there is always a pressure towards it
Using the Model of Supply and Demand
- ceteris paribus = assuming that everything else stays the same
- If two changes happen at the same time and they oppose each other, we lose some of the explanatory power.
Tip
The model of supply and demand forces you to organize your thinking. The more complex the situation is, the more useful the model.