Lecture Notes: Demand and Supply Model in Economics

Introduction to Demand and Supply

• Fundamental model in economics, crucial for understanding market functions.
• Key Question: Who determines the price of gas?
  • Common assumptions: gas station owners, oil companies, Congress, etc.
  • Real Answer: Nobody specifically; it's determined by demand and supply interaction.
• Price similarities across gas stations:
  • Not due to collusion, but due to market forces.

Understanding Markets

• Market Definition: Group of buyers and sellers for a particular good/service.
• Varied types of markets:
  • Formal (e.g., retail stores) and informal (e.g., street vendors).

Perfectly Competitive Markets

• Characteristics:
  1. Numerous Buyers and Sellers:
     • Each is "small" compared to the market.
     • Example: Gasoline market.
  2. Identical Goods:
     • Consumer perception matters more than actual product differences.
     • Examples:
       • Aspirin (generic vs. brand perception)
       • Gasoline (perceived as identical despite differences)

Market Examples

• Commodity markets (corn, soybeans): Many buyers/sellers, identical goods.
• New York Stock Exchange: Shares viewed as identical.
• Gasoline: Competitive in larger towns with many stations.

Importance of Studying Perfect Competition

• Foundation for understanding other market types.

Demand in Markets

• Focus: Buyers side.
• Quantity Demanded (QD): Number of units buyers are willing and able to buy.
• Law of Demand:
  • Inverse relationship between price and quantity demanded.
  • Income Effect: Changes in price affect purchasing power.
  • Substitution Effect: Price changes influence consumer substitution between goods.

Demand Curve and Schedule

• Demand Schedule: Relationship between price and quantity demanded.
• Bill's Demand Example: Shows inverse price-quantity relationship.
• Graphically represented as a downward-sloping demand curve.

Market Demand Curve

• Market Demand: Aggregates individual demands (e.g., Bill and Mary).
• Graphical Representation: Sum of individual demand curves.
• Horizontal Summation: Method for deriving market demand curve from individual curves.

Determinants of Demand

1. Income:
   • Normal Goods: Demand increases with income.
   • Inferior Goods: Demand decreases as income rises.
   • Examples: Ramen noodles as inferior goods; personal stories illustrating variability.
2. Prices of Related Goods:
   • Substitutes: Increase in price of one increases demand for another (e.g., Coke and Pepsi).
   • Complements: Price rise in one decreases demand for the other (e.g., hot dogs and buns).

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Note: This lecture provides foundational insights into economic principles, focusing on demand and supply dynamics in perfectly competitive markets. Understanding these concepts aids in analyzing and predicting market behaviors.